Whether to Pay Off a Low-Cost Mortgage Is Not a Clear-Cut Choice
Our 7.5 percent home mortgage has 15 years before maturity. We are considering paying it off, which we can do without seriously affecting our investments in savings accounts and CDs. A few years ago we were getting as much as 14 percent on CDs, but now it's a lot less. Would it be prudent to take our cash, on which we're getting less than 7.5 percent, and pay off the mortgage-even though most articles I've read say not to pay off a low-interest mortgage? We are both retired and in our late 60s.</br></br>There are enough other factors to consider so that I can't give you a straight yes or no answer. For example, if you are going to continue to itemize deductions on your tax return, then you have almost a wash-your net interest and net income are pretty close to even. The small disparity in net cost may be worthwhile to maintain the option of investing at a higher yield if interest rates go up.</br></br>If you don't have a lot of other deductions, so that you either won't itemize now, or will need the mortgage interest to make itemizing worthwhile, then there is a larger difference. Since you're both over 65, your standard deduction for 1987 will be $6,200; if you use this instead of itemizing, you will lose the deduction for the interest expense but will still have to include the interest on the CDs as taxable income. That would make paying off the mortgage more attractive.</br></br>But if you let the mortgage stand and move an equivalent number of dollars from the S&L to a tax-free investment, that might be a better choice. You can buy high-quality Virginia bonds to yield 7.5 percent or better with no tax liability. As I write this, you can obtain close to 8 percent in an insured tax-free unit trust or insured municipal bond mutual fund, subject only to the 5.75 percent state income tax.</br></br>But if you only feel comfortable with your money in a federally insured savings institution, then you'll probably be happier with the mortgage paid off. Economically you'll probably come out even. You may be ahead if you were to end up not itemizing deductions this year anyway. I try to keep a careful record of all reinvested dividends and capital gains, and pay tax to the IRS annually. The September issue of Forbes magazine warns, "Keep old monthly statements. ... Lose the records and you can claim only the original investment as your basis." How can anyone be expected to retain, say, 40 years of records of even a single investment? Even the IRS destroys most of its records after seven years, so these are not available to prove the cost basis. What is the answer?