Ask Money

Thinking about paying off mortgage

Chris Farrell Aug 8, 2011

Question: I owe $25,000 on my house on a mortgage that will last 7 more years. I have $50,000 in my emergency savings account. I am considering paying off my mortgage from my savings account, and then repaying myself with the “mortgage payment” I would have otherwise paid my bank. If I pay myself back, I will have made up the $25000 in my own savings account in 5 years.

But, is this too risky in today’s environment? Should I keep my emergency savings whole and pay off the bank over time? Thanks! Jim, Houston, TX

Answer: We’re getting a lot of questions again about paying off the mortgage early. It’s probably a combination of essentially zero interest on savings and a desire for greater financial stability. Considering the stock market meltdown and the rising risks of another recession my bioas is toward keeping the savings balance as flush as possible.

That’s my overall reaction and preference. It doesn’t mean in your particular circumstances saying goodbye to your banker is a mistake. So, here are four questions to think through before acting.

First, is this where you want to keep on living as you age? You’re in the home for the long haul.

Second, how secure is your job within your community? In other words, even if you lost your current job you wouldn’t have to leave town to find work.

Third, do you have any major expenses coming that you should set aside extra money in planning for?

Fourth, if there were an unexpected setback to your circumstances because of an illness or a pink slip is your margin of financial safety healthy enough with $25,000 in savings and no monthly mortgage payment?

Taken altogether, if the answer to questions like these is “yes, yes, no and yes” then by all means own your home free and clear.

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