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Q & A with America’s real estate professor: Paying down a mortgage loan

Published: Friday, Dec. 13, 2013 12:00 p.m. CDT

Paying Down a Mortgage Loan

Q.
I recently inherited a fair amount of money and I’m considering paying down my home mortgage balance. I’m a little hesitant because the interest rate on the loan is only 3.75 percent and I just paid several thousand dollars a few years ago to get this low loan rate. What is your view? Marjorie F., Miami, Fla.

A. Strictly from a financial standpoint, it would probably be a mistake to pay down your mortgage balance. Your home mortgage interest may be tax deductible, depending on your tax picture, and if it is then your after tax interest rate may be as low as 2.5 percent to 3 percent. You should keep that loan outstanding as long as possible.

Depending on your situation, you should probably hold that money in a more liquid financial investment and earn some interest and/or dividends that could be at a higher interest rate than your mortgage, still within some pretty low risk assets. Talk to a financial advisor. Holding some cash on hand will help in the future in case you have an emergency, like a job loss or uninsured property or health issues.

The only alternative to this guidance is that if you are getting older and risk averse, it might make sense, especially for peace of mind, to reduce your monthly housing cost by paying down the mortgage.

Overall, it’s a personal choice, and hopefully this guidance gives you additional food for thought.

Real Estate Sales Professional Advising Client on HOAs

Q. I’ve read your articles before about HOAs and all the issues. I’d like to help my clients assess an HOA’s condition so they can make better decisions. There are so many things to consider. Which ones are the most important? Marvin M., Upland, Calif.

A. Unfortunately HOAs are filled with landmines and as an agent you need to be very cautious about advising your clients as to any issues with HOAs. You should concentrate on providing them an education on how HOAs work, what documents they can review to assess the community, plus make sure they know that they might need to and should consider hiring an HOA expert, lawyer, CPA or some professional who will be independent and unbiased in reviewing the documents.

Be very careful and make sure they understand the HOAs are very complicated entities and you are not an expert. They must understand that you can guide them in some of the more important issues, but ultimately they need to review all the information, finances and documents and come to their own conclusions and opinions about the community HOA and whether it is smart to buy into that community.

You also may want to talk to your broker. If you belong to a Realtor® association, ask their lawyer for more guidance on how you should discuss HOAs with your clients. Good luck.

Leonard Baron, MBA, is America’s Real Estate Professor®. His unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate owners how to make smart and safe purchase decisions. He is a San Diego State University lecturer, blogs at Zillow, and loves kicking the tires of a good piece of dirt! More at ProfessorBaron.com. Email your questions to: Leonard@ProfessorBaron.com

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