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The season to pay off mortgage

Chris Farrell Nov 9, 2010

Question: We’ve been great savers over the last 20 years. Have had the luxury of being in high tech professions and respectfully compensated. We bought our house in 1992 (2 bed/1 ba) on one salary and even with identical twins age 8 now have chosen to stay put in this house. We have over 800K in the market and cash readily accessible. Separate from any 401K’s and IRAs. I currently left my job with a respectful severance and am taking a break for the moment. We are okay on one salary. But now won’t be saving anything. And I’m confident I could find contract work when I’m ready. So, we’ve got $130K in cash that needs addressing. In doing the numbers we thought it finally makes sense to pay off the mortgage (~29,000). If we did that we’d be actually paying ourself about $1,500 in interest which is 5% and that is palatable to us – since the money is getting no interest or even a 1/2 percent once we move it. And of course after paying it off we’ll free up $1,100 from mortgage and redirect. Just wanted your opinion as to our plans vs. continuing to pay off the mortgage+interest as is. Thanks. Hilary, Berkeley, CA

Answer: Your situation is a wonderful illustration of the benefits of saving over the years. You have choice.

I like the idea of living mortgage free in Berkeley. I’ve spent many enjoyable days there. My brother and his family are in nearby Oakland, and when I was on a book tour earlier in the year I spoke at the Hillside Club in Berkeley. It’s the arts and community organization founded in the 19th century and it’s the only place I’ve ever spoken at that had a lit fireplace blazing behind me.

Yes, you’ll definitely make a nice rate of return by eliminating the mortgage, at least in today’s low interest rate environment. The numbers are in your favor.

What’s more, the investment may open up other opportunities. Last year I wrote a story for Bloomberg BusinessWeek on second and third careers. It was striking that everyone I interviewed had all felt getting rid of their mortgage gave them greater financial security when they changed careers.

For instance, Hall Kirkham had had a high-powered career, including 11 years at Cambridge Associates, a Boston consultancy that advises nonprofits on managing their endowments. Kirkham loved his job, made a good income, and met his wife there. But he wanted to do something else and in 2005 he entered the Episcopal Divinity School in Cambridge, Mass., at age 41. He’s now a parish priest. His total compensation plunged by 80% to 85%. The blow to his and his wife’s standard of living, however, was cushioned by her salary and they had paid off the mortgage.

I guess you can see that I like the idea of owning your home free and clear.

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