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The Home Equity Dilemma
Dear Jeff:
I am 75 and have a home worth about $350,000 with an equity loan of $50,000 outstanding. I am retired and my income consists of $1,000 from Social Security and interest on investments of $200,000. Would I be better off using my investments to pay off the mortgage and be free of debt, or continuing to pay interest monthly from the proceeds of my investments? I plan to sell the home for a smaller one or a condo in the next two or three years. Thanks for your advice.
Jeff Says:
Start with an examination of your existing portfolio of investments and measure its return on an annual basis. How does it compare to the interest rate of your mortgage? If the rates are comparable, then you could consider paying off the equity loan. If you have invested a portion of your investments in stocks or stock funds and the return on your investments is greater than the loan rate, then I recommend that you keep your money invested.
Your emotions play a role in your decision as well. I have talked with dozens of homeowners who simply hate debt. Despite the fact that they have very low mortgage rates and portfolios that were performing far above the mortgage rates, they felt that they just had to pay off their mortgage, despite the opposite conclusion reached by using the analytical approach. I agree with their decision because they were able to achieve peace of mind. How do you feel about making a monthly mortgage payment?
The curve that you threw to this scenario is that you intend to sell your home in the next few years. If you have truly decided to take this course of action, then I recommend that you keep your investments intact. The liquidity of your portfolio may be very beneficial if your house does not sell as quickly as you would like.
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More about Jeff Fleming
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Missed a week? Peruse past editions.
More about Jeff Fleming
Please read our disclaimer.
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