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Question for the Money Doctors

Question submitted on Mar 19, 2012.


My wife (61) and I (56) make $195,000 per year pre-tax. We have $161,000/13 years/4.37% left on our mortgage on our house that is valued at $423,000. How can we best pay off this mortgage in the next 5 years. We already do bimonthly payments. Thanks!


Not knowing the geographic market you are in, your overall financial situation, nor the terms of your original mortgage I will make some assumptions.  However, since you are in a higher tax bracket I would not be inclined to necessarily pay off the mortgage within 5 years unless you are emotionally focused on having no mortgage.  With you high income bracket, depending on your state rate of income tax, your cost of funds is 2.5% - 3%, presumably fixed, so I wouldn't be in a hurry to pay that off more quickly (I.e. paying off low cost after tax principal with after tax funds).

That being said, another option might be to re-finance to a shorter term and with interest rates coming down further, you will be able to save a little money.  There is a lender in my market currently offering a 10 year mortgage for 3.125%, so using that as an example refinancing $160k, the monthly mortgage payment would be $1,554.22 per month for 10 years.  Certainly reasonable and most likely a cost savings from your current mortgage.  If you pay 1 extra mortgage payment a year in this example you are paid off in about 9 years.  A 5 year ARM might be another option to look at depending on the interest rate in your market and desire to pay a higher monthly cost.

One other consideration will be when the 2 of you intend to retire and what your overall financial situation looks like from an income standpoint.  Will you be working to full retirement age for social security or retiring early?  Your retirement portfolio and income streams will determine what you can do, but presuming you have either saved appropriately over the years based on your income, or you both work until full retirement age, you should be ok to have a mortgage for longer than the 5 years noted in the original question.

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