Picture Dave, a 52 year old father of three who plans on working until he can no longer stand to work. He really hasn’t saved much for retirement and has a mortgage payment of $1,200 with $50,000 left on the mortgage. He and his wife have approximately $40,000 in savings and investments and he is considering using his savings to drastically reduce his mortgage and pay it off in the next few years.
Is this a wise move?
Obviously, we can’t see the entire picture from the 100 word paragraph above, but there are a few things that should not be looked over if you were in Dave’s shoes. I’ll make note of a few and welcome suggestions in the comments as you think of them.
While it would be nice to have ALL debt paid for (especially as you near retirement) it’s important that you don’t forget about the other aspects of your financial picture.
Don’t use up your emergency fund.
For a working couple, most financial experts would suggest a 6-12 month emergency fund. If I were in Dave’s situation, I would want to be on the higher end of that statistic with respect to an emergency fund. This doesn’t leave much room in his $40,000 of savings to apply towards the house.
What’s your income situation look like?
Do you anticipate a drop in your income within the next few years? How about an unexpected drop in your income from an unexpected layoff? If you put your entire savings (or a good chunk of it) into your home, you won’t have access to it without taking a line of credit, or selling your home. In this market, both may be difficult tasks to complete quickly.
What about your expenses?
Dave’s no spring chicken and with retirement around the corner, so are the potentially higher medical bills. A recent report from Fidelity showed that a 65 year old couple retiring this year will need $250,000 to cover medical costs throughout their retirement years.
And don’t forget the kiddos. They’re about to head out to college and may need some help getting their feet on the ground. Of course, they can borrow for school – Dave can’t borrow for retirement.
Will you stay there for good?
Before Dave dumps all his money into a home for the sake of being ‘debt free’ or eliminating an annoying house payment, he needs to honestly ask the question: Do we plan on moving in the next 5 years? If downsizing is in the immediate future, there isn’t really a good reason to tie up all that money into a home with the hopes that you’ll get it back after selling it.
On the other hand, if moving is not likely, you may want to seek advice on refinancing your home. It is possible that refinancing would not only save on interest payments, but also accelerate the payoff.
At the end of the day, cash is king and if you can find other ways to reduce debt while maintaining a strong cash position, I’d consider that first.
So what would you do if you were Dave? Put money towards the home and ditch the payment, or float the payment while you maintain your cash reserve and continue to save for retirement?
Meet you in the comments!
Tim is a personal finance writer at Faith and Finance a Christian financial help blog that provides financial insights for individuals, businesses, and churches. Outside of finance, Tim enjoys spending time with his wife, playing the saxophone, reading economics books, and a good game of RISK or Catan. Find him on Twitter and Facebook and subscribe to the Faith and Finance RSS feed.
He has a good emergency fund, but it could be more. It would be risky to use it to pay off the house. Why not increase principle payments to the mortgage. It’s a way to play it safe and pay off the mortgage sooner. With so little left on the mortgage, why not finish it. If it were larger I would say add to the emergency fund.
Personally, I don’t plan on taking a mortgage into retirement. It sounds as if Dave has some serious saving to do. He has another 30 years or more of life left at age 52 and his wife likely has even longer. Paying off the mortgage is such a small part of the equation compared to the overall savings picture. He would be best to focus on that first.
I hope I have more money than that at 52…lol.
As you said, it’s hard to really decide from a single paragraph. I hope he’s putting money into some sort of retirement, that he has all the proper insurance.
Also, I agree with your point about the emergency fund – if something happens with Dave’s job then he’s out of luck with his mortgage gone.
If he has some other investments outside that 40,000 (401k, IRA, etc) then I’d say he would be fine taking 10,000 and putting it on his house. It will make him feel good and maybe help him out. However, that assumes his other financial areas are fairly healthy.
Reality seems to be that some of that money is in stocks, mutual funds, or some other investments and some of that money is in a savings account. If that’s the case then he shouldn’t touch it.
That’s just my two cents.
Yes… Ideally all the debts should be paid off before retirement. Similarly, insurance covers should also be taken considering the retirement age .
Dave should pay off his mortgage, if only because his retirement planning looks thin. But he probably should pay it off by making higher monthly payments, instead of in a lump sum. $50,000 with 13 years to go before turning 65 is very doable.
The $40k in savings needs to be kept liquid since he has kids. He might begin moving money into a Roth IRA, that way the money is invested for retirement but not locked down until then. If he needs to he can access his contributions without having to worry about taxes or penalties. And once he hits retirement, any withdrawals, including earnings, can be withdrawn without income taxes. That will be even more important if his retirement income is already on the low side.
Many banks offer the option of making by-monthly payments or every two weeks. For a 30 year mortgage this alone will reduce the payments by 7 years. This may be an option along with some extra added to the principle to help get it paid off faster while still acheiving his savings goals.