When to pay down your mortgage

ear Liz: Should you pay off your mortgage or keep a sudden financial windfall? I’m in that situation and was surprised to find that financial experts, including you, generally recommend investing the cash. I understand the attraction of the argument but am not sure the assumptions hold water.

The experts’ argument boils down to this: You can make more money by investing the proceeds than you’d save by paying off the mortgage. Keeping the mortgage — with an interest rate of, say, 5.8% — is fine because the returns on your investments, plus the tax deduction for the mortgage, will more than cover that cost. A mortgage is the cheapest money you can get and a hedge against inflation. This plan also gives you more liquidity.

I say: Unless I can guarantee that I can make 5.8%, I might lose money. And I’d basically be borrowing money just to invest it (and keep some liquidity). That seems risky! If certificates of deposit were earning 6% it would be a no-brainer, but they’re not. Also, it’s impossible to put a price on the sleep-well-at-night factor.

I’d like to read your thoughts.

Answer: You’re right that the investing argument requires a lot of assumptions that may not hold up in real life. But that’s not the reason most people should think twice about paying down a mortgage.

The reality is that most people have better things to do with their money than pay down a low-rate, deductible debt such as a mortgage. For one thing, they should be taking maximum advantage of their tax-deferred retirement options, especially if their company plan offers a match. They also need to pay off other, higher-rate debt before considering extra mortgage payments, and they should have a substantial emergency fund set aside as well. Then there’s insurance to consider: If you don’t have adequate life, health, disability and long-term care coverage, those policies should be purchased before considering mortgage repayment.

If you’ve got all your bases covered and still want to pay down or pay off your mortgage, then have at it. For many people, the security of a paid-off home is well worth forgoing some extra investment income.