Dear Liz: We have a 7% fixed-rate mortgage with a $150,000 balance and a second, adjustable rate mortgage with a balance of $100,000. I’m self-employed and my wife doesn’t work. My income fluctuates a lot every month. We just sold a property and have $240,000 left after taxes. Should I pay off both mortgages or just the adjustable loan?
Answer: When deciding whether to pay off a mortgage, many people focus on how much interest they could save or what their “return” on their money would be. (If you’re in a 35% tax bracket for federal and state income taxes, for example, your return on paying off a 7% mortgage would be 4.6%.)
In reality, though, most people have better things to do with their cash than pay off relatively low-rate, tax-deductible debt.
Are you, for example, on track with your retirement savings? Do you have a substantial emergency fund? Most families would be wise to set aside a cash reserve to cover three to six months’ worth of expenses. Someone who is self-employed with a non-working wife might want to boost that emergency fund to 12 months’ worth of expenses.
Are you adequately insured? Since your wife is financially dependent on you, you probably should have a substantial life insurance policy. You may want to get one on her as well, if she cares for minor children and you’d have to hire a nanny if she died. You may also need disability coverage.
If you’ve covered all these bases and still want to pay off your mortgages, feel free. Otherwise, put the money to better use.