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Welcome back to “Ask an Advisor,” the advice column where real financial professionals answer questions from real people. The topic can be anything in the world of finance, from retirement to taxes to wealth management — or even advice on advising.
Owning a home is part of the American dream. According to the U.S. Census, 65.9% of U.S. adults own a home, as of this year’s second quarter. And that’s in spite of historically high interest rates. As of this month, the average rate for a 30-year fixed-rate mortgage is 7.63%, according to Freddie Mac — the highest it’s been in two decades.
Nevertheless, Americans think homeownership is worth the price. Twenty-three percent of respondents to a CNBC survey said buying real estate was the best way to increase their personal wealth, more than any other financial decision.
So when the end of a decades-long mortgage comes within reach, it’s tempting to pay the rest off in one lump sum. But is that the best financial decision? Experts say there are many factors to consider — especially in terms of what that money could do if it weren’t going into the house.
One couple in New Jersey is facing this exact dilemma. Here’s what they wrote:
Dear advisors,
My husband and I have a chance to pay off the rest of our mortgage right now. Should we take it?
We’re both 64 and looking to retire in the next few years. We bought our house in Passaic County, New Jersey, in 1998. The price was $240,000, and we refinanced twice. Now we have $48,000 left to go.
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Thankfully, we have enough savings to cover that amount right now. So we have two choices: Pay off the rest of our mortgage over 12 years, at our interest rate of 4.25%, or get it all over with right now.
What should we do? We plan to live in this house for our retirement, so it would be wonderful to own it outright. But are there any tax issues or other consequences to paying such a large sum?
Thank you so much for your help,
Pondering in Passaic
And here’s what financial advisors wrote back:
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