Should I Use Savings to Pay Off My Mortgage?

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Welcome to the “2-Minute Money Manager,” a short video feature answering money questions submitted by readers and viewers.

Today’s question is about paying off a mortgage; specifically, whether it’s a good idea to use money in your savings account to do it.

This is a question I’ve been asking myself, so I was happy to answer it. Watch the following video and you’ll pick up some valuable info. Or, if you prefer, scroll down to read the full transcript and find out what I said.

You also can learn how to send in a question of your own below.

For more information, check out “7 Times It Makes Sense to Pay Off Your Mortgage Early” and a similar-sounding but different story, “7 Painless Ways to Pay Off Your Mortgage Years Earlier.” You can also go to the search at the top of this page, put in the word “mortgage” and find plenty of information on just about everything relating to this topic.

If you’re shopping for a mortgage, you can click here for rates from multiple companies. And if you need anything from a better credit card to help with debt, be sure and visit our Solutions Center.

Got a question of your own to ask? Scroll down past the transcript.

Don’t want to watch? Here’s what I said in the video

Hello, and welcome to the “2-Minute Money Manager.” I’m your host, Stacy Johnson, and this answer is brought to you by Money Talks News, serving up the best in personal finance news and advice since 1991.

Let’s get to our question for the day. It comes to us from Marsha:

“We’re several years from retirement and have accumulated enough in our savings to pay off our mortgage. Which is best: money in the bank, or a debt-free home?”

I’ve got three things for you, Marsha:

No. 1: Mortgage payoff pros

One advantage to getting rid of that mortgage is increased cash flow. Money you’re no longer putting toward your mortgage can now go into something more productive — like your savings, or maybe an investment account.

Another advantage is not having that obligation over your head. Not only does it feel good, but should things go south, it’s one less bill to worry about.

Finally, if you’re earning less on your savings than you’re paying in mortgage interest, you’ll be richer. Look at it this way: You’re effectively turning your mortgage interest rate into your savings rate. In other words, if you’re paying 4% on your mortgage and you pay it off, that’s like earning 4% tax-free and risk-free. That’s a compelling argument, especially if the money you have in the bank is earning next to nothing.

No. 2: Mortgage payoff cons

What are the disadvantages of paying off a mortgage? One is turning a liquid asset — money in the bank — into an illiquid asset, home equity. For example, a few years back during the housing crisis, I had a bunch of money in the bank earning very little. I used it to buy the house next door really cheap. I fixed it up, then sold it for a big profit.

Theoretically, I could have borrowed against my house to raise the cash, but I probably wouldn’t have. Because I had the cash and it wasn’t earning much, I did something with it that earned a lot.

In short, having money in the bank can really be an advantage if you’re planning to use that money. It feels good to know that if things go south, or an opportunity arises, you’ve got the funds to deal with it.

Another thing to consider: You might get a tax deduction for your mortgage. This is harder to do now because the standard deduction for married couples is $24,000, so a lot of us are no longer going to be getting a tax write-off for mortgage interest. Still, if you’re getting a write-off, that essentially lowers the cost of the interest you’re paying.

No. 3: The bottom line

I’ve given you pros and cons, but what should you do? Well, it depends.

Pay off your mortgage if:

  • You’ve got all your retirement accounts fully funded and you’re socking away as much as you can.
  • You’ve got a ton of savings in an account that’s earning almost nothing.
  • You’re not getting a tax deduction.
  • You can’t see any future use for the cash.

On the other hand, you might be better off leaving your mortgage alone if:

  • You’re earning more with your savings than the mortgage is costing.
  • You’re getting a tax deduction.
  • You might find something rewarding to do with your cash.

Either could be the correct answer.

Does that make sense, Marsha? I hope so. And I hope you will tune in next time.

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The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.

About me

I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.

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