RepayRepaying Loan Early?

Should this homeowner cash out investments to repay their mortgage?

Q: We only owe about $60,000 on our house (thanks to your sound financial advice when we got the mortgage, and suggestions about making extra payments along the way). We have two dividend reinvestment plans (DRIP) worth about $110,000 (again, due to your advice).

Should we take money from the DRIP investments and pay off the house? We have no early repayment fees on our home mortgage because I read your book for home buyers. Once the loan is paid off, should we then invest what we would have paid to our mortgage company into the DRIP investments for retirement?

We have no other debt. I just feel as though we’re so close to getting this all paid off. Many thanks for any advice that you can offer.

Repay your loan early? Depends on your interest rate

A: It’s terrific that you’ve read Ilyce’s books and taken her advice over the years. It sounds like you’re doing a tremendous job staying the course and building generational wealth.

Our question: how much interest are you actually paying on the remaining mortgage loan?

  • If your interest rate is 3 percent, you’re probably earning more than that on your investments. So, you should leave things as they are and continue to pay off your mortgage slowly each month.
  • What if your investments are only earning 2 percent, and you’re paying 7 percent for your mortgage? Then it makes more sense to take some of those funds and pay down, or pay off, your mortgage. Still, once you’ve nearly paid off your mortgage, you’re generally paying very little interest and most of your payments are principal.

Repaying mortgage helps you sleep at night

Still, are you having trouble sleeping at night? Are you worried about your loans? That’s a different story. But we’d hate to see you take more than half of your investment funds to pay down a fixed asset that will eventually get paid off anyway. This is truly an investment decision. Do you take cash that’s earning X to pay off a debt costing Y?

We get how frustratingly slow it is to pay off the last few thousand dollars on a loan. You just want it to be done. Off the books. But, unless you just can’t sleep with the debt hanging over you, take comfort in knowing that you can repay it whenever you want.

Will you need cash? Don’t repay your mortgage

Once you do pay off that loan, however, that money is locked up. You won’t be able to tap it without taking out a home equity line of credit, second mortgage, or until you sell the property. If you suddenly need cash, you’ll pay a far higher interest rate today than what you have now.

Finally, consider whether you’ll pay federal and state tax on the funds you tap from the DRIP investment plan. The stock market has gone up substantially over the last few years. Selling those investments may result in a hefty tax bill.

At the end of the day, this is a good problem to have. Because it isn’t much of a problem at all. It’s the happy result of a lifetime of good financial management. Congratulations, and let us know what you decide to do.

Read more about mortgages

Paid Off House: Will It Affect My Trust?

Debt: How One Bad Move Can Wreck Your Financial Life

Final Mortgage Payment

Mortgage Scam: How to protect your single biggest asset

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