Ask an Advisor: Should I Pay Off My 2.375% Mortgage or Invest in a 4% CD Before Retiring in 7 Years?

I’ve been debating whether to wage disconnected my mortgage. I’ve refinanced astatine 2.375% and tin get a certificate of deposit (CD) for a twelvemonth astatine 4%. I was adding to my owe outgo by astir $1,000 a period to wage it disconnected successful 7 years alternatively of 14 years. I privation to discontinue successful 7 years, and though my Social Security volition beryllium astir $3,500, and my hubby volition inactive beryllium working, I’m not definite if that is wise.

-Jan

Whether you should wage disconnected a owe aboriginal oregon put much depends connected what you’d anticipation to summation by choosing 1 implicit the other. It could beryllium that you simply privation to take the enactment that leaves you amended disconnected financially. But you whitethorn privation to see risks, the effect connected your budget, and purely nonfinancial factors arsenic well.

Here’s however to deliberation done this decision. (This instrumentality tin assistance lucifer you with imaginable advisors portion you navigate the lead-up to retirement.)

Comparing Your Mortgage Rate to Investment Return

Many radical similar to framework the determination of whether they should wage disconnected their owe arsenic a tradeoff between 

the involvement complaint connected their owe and the instrumentality they could gain if they had invested that wealth instead.

The thought is that if they tin gain a higher complaint of instrumentality than what they wage successful interest, they are amended off. As a baseline, that is simply a logical approach.

But different constituent of that determination is the hazard associated with the investments. For example, accidental the wealth is alternatively invested successful a banal portfolio. Even successful a well-diversified one, determination volition beryllium fluctuations successful that portfolio’s value. That aforesaid constituent of hazard isn’t contiguous erstwhile you wage down a indebtedness equilibrium with a fixed involvement rate. That’s due to the fact that you cognize the magnitude that you prevention – it’s that fixed involvement rate. 

So, the question evolves. You truly request to comparison the involvement complaint connected your owe to the complaint of instrumentality you can reasonably expect to gain connected a portfolio that exposes you to an magnitude of hazard you are comfy with. Your clip skyline matters a large woody successful that analysis, and you should see it. (This instrumentality tin assistance lucifer you with imaginable advisors portion you navigate the lead-up to retirement.) 

In immoderate case, 2.375% is an incredibly debased involvement rate. It would beryllium casual to marque a mathematically supported statement for not paying that equilibrium down immoderate sooner than you person to. If you instrumentality the one-year CD astatine 4%, that’s a fixed rate, truthful you won’t person the aforesaid volatility considerations arsenic you would with a longer-term investment. 

Just beryllium definite to relationship for the taxation implications. That CD involvement is taxable. You whitethorn besides beryllium getting a taxation deduction for the involvement you’re paying connected the mortgage.