This Week's Q & A

Q: When my husband and I refinanced our mortgage about a year ago, we paid off a large portion of the outstanding balance. We have about $38,000 left and are in a position to repay that as well. Is that a good move?

A: There is no “one size fits all” answer to your question. Your financial profile, your long- and short-term financial planning goals, estate and tax planning issues, and your risk tolerance levels all will enter into this equation. Let me highlight just two of the key issues you should consider: investment alternatives and liquidity.

If you use this available cash to pay off your mortgage, that money won’t be available to invest elsewhere. Is this the best use of your funds, or are there other investments that might offer you a higher return over time? When you are comparing those alternatives, consider the risks and your tolerance for them. The investments offering the highest returns also tend to involve the largest risks. Real estate has proven to be a solid investment over time, but it’s not risk-free. There are periods when home values rise slowly or not at all, and some periods when values decline. You have to consider those possible ups and downs as you project this “investment” over time.

If you pay off your mortgage, you won’t have to make those monthly payments any longer, but you also will lose your mortgage interest deduction, which may or may not be a significant consideration, depending on your tax bracket and the size of the deduction involved.

The liquidity issue probably is even more crucial. How much of your readily available cash will you have to tap to pay off the mortgage? Will you still have sufficient funds to meet essential expenses, including emergencies that you can’t foresee? A home is a relatively illiquid investment. True, you could obtain a home equity loan, if necessary, but you can’t predict what interest rates will be at the time, nor can you be certain of your ability to qualify for the loan. Financial setbacks and declines in real estate values might make it difficult or impossible for you to tap this equity when you need it. That is not a major concern if you have other liquid assets available; it is a very serious consideration if you do not.

There is no question that repaying a mortgage may be a viable option for many homeowners; a capable financial planner can help you determine whether it is the best option for you.