Question:
Dear Dr. Don,
I have a second mortgage with a $54,000 balloon payment that comes due in 10 years (2021). The interest rate on this loan is 9.25 percent. I have about $250 per month extra that I could put into paying off the debt, but I'm debating if I should use the money instead to invest in the stock market. If I invest, I'll have the choice of paying off the mortgage or refinancing it when the balloon payment comes due. Should I pay off my balloon second mortgage or invest the money? Your advice would be much appreciated.
-- Pedro Ponders
Answer:
Dear Pedro,
My rule of thumb is that you should pay down your mortgage if the effective interest rate on your mortgage is greater than what you expect to earn after tax on your investments. Bankrate's mortgage tax deduction calculator lets you calculate the after-tax rate on your mortgage, assuming that you can fully utilize the mortgage interest deduction on your tax return and it isn't just replacing the standard deduction. If you can't fully utilize the deduction, then your effective mortgage interest rate is higher.
You can use the same calculator to calculate the expected after-tax return on your investments -- just "zero out" the closing costs and input an expected return on your investments.
