Life Care Planning: Pay off the mortgage — or not

Advertisement
Attorney Sandra W. Reed

TheFlashToday.com NEWS & SPORTS – FREE & LOCAL

InOurOpinion_12James and Frances Webster were born in 1920, were married in 1942 and bought their family home in 1947. When they paid off the 30 year note in 1977, they burned the mortgage and toasted each other with champagne. Paying off the mortgage was a cherished dream and, generally, a great idea for their generation. It may or may not work as well for baby boomers. This is why people check out people like Eitan Pinsky mortgage broker in Vancouver for great mortgage deal.

The Webster’s son, Thomas, was born in 1950 and married in 1977. He and his wife, Marilyn, bought his first home in 1980. After having traded up to larger homes over the years, they are faced with the decision whether to prepay their current mortgage or not. Thomas and Marilyn are both 65 and are still working. They would like to retire in two years but realize that making mortgage payments may not be so easy after their paychecks stop.

Some financial planners advise that, because the current low mortgage interest rates are so low and interest payments are tax-deductible, home owners should consider continuing making payments and investing the spare money they would use to pay off the mortgage early. Whether this is good advice for Thomas and Marilyn depends on a number of factors, including how much they have accumulated in savings and whether or not they have other debt. If you are looking for a mortgage that fits you, you might be interested in looking at something like Money Expert for more information.

Pay Off Credit Card Debt Before Pre-Paying a Mortgage

If Thomas and Marilyn have credit card debt, they should pay that off first before they prepay the mortgage because the credit card interest rates are considerably higher than the mortgage interest rate and because the interest paid on consumer debt is not tax-deductible. Different banks have different requirements for those who wish to take out a mortgage, those who are interested in learning about mortgages might want to Visit DNB bank for more information.

Pre-Paying Mortgage from Retirement Accounts

Thomas and Marilyn’s financial planner told them as a general rule it is unwise to take funds out of individual retirement accounts or 401(k) accounts to prepay a mortgage. His reasoning was that income tax will be owed on amounts taken out while the interest paid on the mortgage is tax-deductible.

However, Thomas and Marilyn should calculate the tax they will have to pay on the amount they need to take out of retirement funds to prepay the mortgage. Adding that withdrawn amount to the year’s income might even push them into a higher tax bracket and force them to pay additional tax.

They should also determine whether their itemized deductions total more than the standard deduction. If it is not, then the benefit of tax-deductible mortgage interest is nil as to them.

Choices of Investments Affects the Decision

According to Jane Bryant Quinn, a personal finance expert and author of Making the Most of Your Money Now, the type of investments a couple holds is a major factor to consider before prepaying a mortgage. In calculating the rate of return on any prepayment of their mortgage, Thomas and Marilyn need to understand that that rate of return is equal to the interest rate they are paying on their mortgage. Any investment they make with the money they would use to prepay ought to return more than the amount of the mortgage interest rate.

If Thomas and Marilyn have the bulk of their savings in certificates of deposit (CDs) or in high interest bonds or bond mutual funds, Ms Quinn would encourage pre-payment at today’s interest rates.

She would not advise prepayment if Thomas and Marilyn are invested in stock funds and their mortgage rate is 4.5% or less. Quinn writes that historically stock funds with dividends reinvested have done much better than the 4.5%, meaning that the Websters would “probably come out ahead.”

However, if Thomas and Marilyn have a mortgage with a higher interest rate than new mortgages available today – say 8.75% – (and the balance owed is too low to interest a financial institution in refinancing) they would be much less likely to beat that rate even invested in stocks.

The Long-Term Care Factor

Thomas and Marilyn’s financial planner failed to address the impact of the cost of long-term care when discussing their decision. Their need to make other arrangements to pay for long-term care will depend, in part, on how much they have saved. If they plan to periodically withdraw funds from savings for daily living expenses, they need to determine if their savings include sufficient funds to pay for long-term care needs.

If they have not saved enough for anticipated long-term care and do not already have long-term care insurance, before they expend cash on hand to pre-pay the mortgage, they should explore the cost of obtaining insurance that could pay for at least a portion of long-term care, should they need it. The Websters might be wiser to spend the extra cash to purchase long-term care insurance instead of pre-paying the mortgage.

If they have neither funds saved nor long-term care insurance and cannot afford long-term care insurance, they should consult a professional(s) who can help them develop a plan to qualify for Medicaid if possible.

The home is not an asset that counts toward the $2,000.00 in assets allowed for qualifying for Medicaid. Paying off the mortgage on the home converts cash that does count toward the limit into an asset that does not count toward the limit. The professional(s) they consult should be able to look at their entire financial situation to determine if pre-payment of the mortgage seems advisable and whether it would be best to pre-pay now or wait until the time they apply for Medicaid benefits to pay off the mortgage.

To Pay Off the Mortgage or Not

Today’s baby boomers face a more complicated decision-making process than their parents did concerning the pre-payment of a mortgage. There is no general rule, despite the numerous publications that suggest one.

Sandra W. Reed is an attorney with Katten & Benson, an Elder Law in Fort Worth, Texas. She lives in beautiful Somervell County, near Chalk Mountain. If you have questions about this column or wish to suggest a topic of interest, Ms Reed may be contacted by phone at 254.797.0211 or by email at swreed2@yahoo.com.

Be the first to comment

Leave a Reply