Is it a better deal to pay off my 2.375% mortgage or invest in 4% CDs?

I debated whether to pay my mortgage. I refinanced at 2.375% and can get a one year certificate of deposit (CD) at 4%. I added about $1,000 a month to my mortgage payment to pay it off in seven years instead of 14. I want to retire in seven years, and even though my social security will be around $3,500 and my husband will still be working, I’m not sure if that’s wise.

– Jan

Whether you should pay off a mortgage sooner or invest more depends on what you’d hope to gain by choosing one over the other. You may simply want to choose the option that leaves you better off financially. But you may want to consider the risks, the effect on your budget and purely non-financial factors.

Here’s how to think about this decision. (This tool can help match you with potential advisors as you navigate retirement.)

Comparing mortgage rate with return on investment

Many people like to frame the decision of whether they should pay off their mortgage as a trade-off between

the interest rate on their mortgage and the return they could earn if they invested that money instead.

The point is, if they can earn a higher rate of return than what they’re paying in interest, they’re better off. As a basis, this is a logical approach.

But another element of this decision is the risk associated with the investments. For example, suppose the money is instead invested in a stock portfolio. Even in a well-diversified one, there will be fluctuations in the value of that portfolio. The same element of risk is not present when you pay off a debt with a fixed interest rate. That’s because you know the amount you’re saving – it’s that fixed interest rate.

So the question evolves. You really need to compare your mortgage interest rate to your rate of return can reasonably be expected to earn from a portfolio that exposes you to an amount of risk you are comfortable with. Your time horizon matters a lot in this analysis and you should take it into consideration. (This tool can help match you with potential advisors as you navigate retirement.)

In any case, 2.375% is an incredibly low interest rate. It would be easy to make a mathematically sound argument for not paying off that balance sooner than you have to. If you take the one-year CD at 4%, that’s a fixed rate, so you won’t have the same volatility considerations as with a longer-term investment.

Just be sure to consider the tax implications. That CD interest is taxable. You may also get a tax deduction for the interest you pay on your mortgage.

The story continues

Consider your retirement preference

You may not want to base your decision solely on a mathematical comparison. Consider your preferences and emotions, especially when you think about your potential retirement in seven years.

Many people derive a significant amount of satisfaction from paying off their mortgages. They want to know that they own their home.

While you can’t put an exact dollar value on this satisfaction, you can approximate it. How? Simply ask yourself if you’d rather have the amount you estimate you’ll have if you save that extra payment in seven years or a paid-off house.

For some people, that satisfaction and the relief it brings is worth a lot. They would choose a paid off house over saving a large amount of money. For others, it’s not worth much. They might choose to keep the mortgage and invest more, even if saving money results in only a small gain over paying it off early. (This tool can help match you with potential advisors as you navigate retirement.)

As people enter retirement and no longer receive salaries, they tend to shift their preference to a paid-off home. It’s understandable, and not having a mortgage payment in retirement certainly increases the amount of flexibility in your budget. You imply in your question that this may be an important factor for you, or at least that it is in your mind.

Conclusion

Start with the mathematical comparison. From there, consider how much weight you want to give to the other factors. Ultimately, make your decision based on the totality of the situation.

Brandon Renfro, CFP®, is SmartAsset’s financial planning columnist and answers readers’ questions about personal finance and tax topics. Have a question you’d like answered? Email [email protected] and your question may be answered in a future column.

Please note that Brandon is not a participant in the SmartAsset AMP platform nor is he an employee of SmartAsset and has been compensated for this article.

Find a financial advisor

• If you have questions specific to your investment and retirement situation, a financial advisor can help. Finding a financial advisor doesn’t have to be difficult. The free SmartAsset tool gives you up to three verified financial advisors serving your area, and you can interview at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• Are you planning for retirement? Use SmartAsset’s Social Security calculator to get an idea of ​​what your benefits could look like in retirement.

• Keep an emergency fund handy in case you face unexpected expenses. An emergency fund should be liquid — in an account that isn’t exposed to significant fluctuations, such as the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But a high interest account allows you to earn compound interest. Compare savings accounts from these banks.

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The post Ask an Advisor: Should I Pay Off My Mortgage or Invest in CDs? I refinanced my mortgage at 2.375% but can get a CD at 4%. Besides, I want to retire in 7 years. appeared first on SmartAsset Blog.