If you are paying on a second mortgage & have the $ to pay it off, should you?
Hannahbelle asked:
We have a second mortgage on our home. The interest rate varies between 7 & 8 percent. Would we be better off to take money out of an annunity (tax free) and pay this off or leave it in and draw 3% interest? Thank you.
Melanie
We have a second mortgage on our home. The interest rate varies between 7 & 8 percent. Would we be better off to take money out of an annunity (tax free) and pay this off or leave it in and draw 3% interest? Thank you.
Melanie
Tags: Interest Rate, Money, Second Mortgage
July 24th, 2009 at 4:16 am
Jesse
I would pay it off. In fact I did pay my second mortgage off. Why borrow at 7.5 % to collect 3% ?
Unless you need that money for another reason you will be better off without the extra loan.
July 25th, 2009 at 10:16 pm
Ricardo
You should pay off the second mortgage. Not only is it costing you more in interest than your money is making, but it will also get rid of a debt payment for you.
July 26th, 2009 at 2:46 pm
David
you are paying 7-8% but only getting 3% pay it off
July 27th, 2009 at 2:28 am
Duane
i would pay off mortgage then put that money back in annuity each month.
July 29th, 2009 at 6:56 am
Lewis
Check and make sure there isn’t a prepayment penalty on your 2nd before you make the decision
August 1st, 2009 at 12:19 pm
Dale
Based on Interest rates, paying the mortgage off looks like an obvious win. However, if the money in the anniuity was deposited tax-free, like some versions of an IRA, there may be taxes and possibly penalties involved in an early withdrawal. Make sure you know the tax implications of doing so.
Grandpa
August 3rd, 2009 at 3:23 am
Arlene
Pay it off.
Then take the same amount as your monthly payment and put it in a high interest FDIC insured on-line bank account.
Paying off the 2nd mortgage makes sense since the interest you lose by cashing in the annuity is less than the interest you pay on the 2nd mortgage.
Investing the same amount as your present monthly payment on the 2nd mortgage will allow you to save up enough to purchase another annuity. Investing in a high pay rate on-line bank like HSBC or ING Direct will give you a faster build up than investing in your local bank.
Hope this helps
Jerry-the-bookkeeper
August 4th, 2009 at 4:24 am
Christopher
The difference between your tax free 3% and the 7-8% will probably ride on whether there is a prepayment penalty. Also, the effective yield on your 3% depends on your tax bracket. There’s some math to be done.
August 7th, 2009 at 1:37 am
Jose
It’s generally a good practice to leave any retirement type funds, which I assume your annuity is, untouched except in a dire emergency. This is the idea of paying yourself first, and any good financial consultant will tell you that.
There are also tax implications to consider; the interest you pay on your second mortgage is tax-deductible, and so it is not as simple as comparing interest rates.
If you want to pay off/down your second mortgage, it’s better practice to get rid of your “latte factor” (see The Automatic Millionairre, by David Bach), i.e., minimize frivolous spending and use those savings to focus on paying down your debt.