BC-glink 11/30 TMS Original

Staff Writer
Columbus CEO

REAL ESTATE MATTERS For release 11/30/13

(NOTICE: For retransmission or other content delivery inquiries, please contact TCA Customer Service, 1-800-346-8798, tcacustomerservice@tribune.com.)

Don't pay off mortgage at expense of cash cushion

Tribune Content Agency

By Ilyce Glink and Samuel J. Tamkin

Q: I am a 70-year old active, healthy widow. I have a balance on my mortgage of $128,000 at 4.5 percent.

My investments make about 5 percent (after taxes) but I also have a large amount of money in cash earning barely 1 percent. I have enough money in that cash account to pay off my mortgage, but I'm wondering whether I should do that.

I live in a ranch-style home and love my location, but I'm thinking about the future. When I can't take care of the yard or house anymore, I would want to move to a retirement community or condo. Right now, my mortgage is $835 per month, and my home value has dropped down to what I paid for it, about $150,000 to $160,000.

What do you think I should do about paying down my loan? Do you have any other suggestions for me?

A: Paying down or paying off your mortgage is a big decision -- particularly if you have a low interest rate loan, which you do. Let's go through all of the factors someone should consider before forking over a big chunk of change into a relatively illiquid (meaning, you can't easily get the cash out) investment.

First, do you have enough cash on hand? In your case, you say that you have plenty of money sitting in cash earning barely 1 percent. When you pay off your loan (which is at 4.5 percent), you will effectively earn 4.5 percent on your prepayment. That's a significant step up from what you're earning in savings.

But having enough cash on hand means, to us, that you also have emergency reserves above and beyond the $128,000 that you'd use to pay off your loan. If something breaks in the house or you need a new roof, you might need $10,000 to $20,000 for that repair or replacement. It would be unfortunate to have to then take out a home equity loan or line of credit at a higher interest rate with a shorter payout simply because you didn't have enough cash left on hand to cover the expense.

We'd also want you to have enough of a cash cushion so that you've got plenty of runway to deal with problems in the house and in other parts of your life, such as emergency travel, car repairs, or health or family issues. If you don't have enough cash socked away to deal with these issues and problems, then you're better off not paying off your mortgage.

If your cash cushion is sufficient to deal with all of these emergencies, then go ahead and pay off your mortgage.

Another option is to make a significant pre-payment and simply refinance to a short-term loan (say, a 10-year mortgage) with a lower monthly payment. Why do this? Because you might have another place to invest your cash other than in your loan that will earn you a greater rate of return. Or, you might want to purchase another property, either as a second home or as an investment.

Depending on where you live, you may be able to purchase another property for $150,000, get a mortgage for $75,000 at 4.5 percent and collect $1,200 per month in rent. That will significant improve your cash flow, and you will beat the return on investment you're receiving from the bank (about 1 percent).

We wouldn't worry about where you want to move to when you re-retire, which is the term du jour for seniors who move around after they hit the official "retirement" years. If you decide the house is too much upkeep in the future, you can sell it at that time. If you buy your condo now, you might find you want something different (bigger, smaller, nicer, newer or in a different location) when the time comes.

The nice thing is that you have options and can spend time thinking about what you want to do.

(Ilyce Glink is the creator of an 18-part webinar and ebook series called "The Intentional Investor: How to be wildly successful in real estate," as well as the author of many books on real estate. She also hosts the "Real Estate Minute," on her YouTube.com/expertrealestatetips channel. If you have questions, you can call her radio show toll-free (800-972-8255) any Sunday, from 11a-1p EST. Contact Ilyce and Sam through her website, www.thinkglink.com.)