When Paying Off a Mortgage Is Not a Good Idea

Q: Looking at the numbers, it seems to be a good idea to pay off my mortgage. We have nine years remaining on a 15-year term at 5 percent and we owe $106,000. My home equity line is at prime. We plan to stay in the house for three to four more years. I know that a spike in inflation will change the interest rate on the home equity loan, but what do you think? Should we pay off our loan with the cash we have on hand?

A: It's a risk; if interest rates skyrocket and your financial position changes, you could wind up in a tight spot. You'll have all of your cash in your house but none to live on if you or your spouse loses a job, incurs unforeseen medical expenses or decides to make a change.

And in the current real estate and financial markets, if you want to take out equity from your home, you may have trouble doing that.

Because you're in a 15-year loan, you've already shaved down your interest rate relative to what a 30-year loan would have carried. Now you're mostly paying principal and very little interest.

Why not split the difference? Instead of paying off your loan entirely, why not pay off part of the balance? If you write a check for $50,000, you'll be left with just a $56,000 balance, and you should be able to pay that off with regular payments in perhaps five years or less.

Paying off part of the loan should leave you with a significant cash cushion, which might prove very helpful in the current economy.

You didn't mention the loan balance on your home equity line. If you have a small balance, you should be fine keeping it and paying it off over time even if interest rates rise. If you have a large balance, you might want to keep more cash available in case you decide you'd rather pay down the home equity line of credit than face the possibility of raising rates and not having the cash to pay it off.

Q: I would like some advice before I approach my bank. We could have paid cash for our $1 million dollar home in June 2006. Instead we put 20 percent down and took a 10-year interest only mortgage for $840,000 at 6.375 percent.

We put the $840,000 into lifetime annuities that will forever pay us 5 percent annually guaranteed, which is almost enough to pay the $4,460 mortgage payment when you consider the federal tax deduction for mortgage interest.

We are in year three of this mortgage, so the full amount is due in seven years. We also will be able to get back our principal on the annuity after 10 years. It is guaranteed.

We would like to refinance at a lower rate, but our house is now only worth about $850,000 so we have little equity, if any.

How should we approach our lender about a lower rate? I lost my job in March, and I am now 65 years old and considered "retired." My husband is a school bus driver, which gives us benefits and small income. We have other income from annuities and investments, so we are not cash poor.