QUESTION: I’m 46 years old, single, and I have no debt, other than a $57,000 mortgage. I’d like to pay it off, leave my current job and start my own business doing something creative. Can you advise?
Crystal Bond, Tahlequah, Okla.
ANSWER: Have you figured out your business plan yet? If not, slow down. Before you tackle what to do with your mortgage, first flesh out the details of your small-business idea. Consider everything from funding to marketing to sales goals for your first year of operations. “Do your homework. Be cautious. Take your time. And talk to a lot of people,” says Santa Ana, Calif.-based financial planner Karl Romero. Starting a business always costs more than you think it will, so make sure you’ll have enough cash on hand to get things rolling. Also, be sure to pump up your emergency fund so that it has at least six months’ worth of living expenses, should times get lean.
As far as that mortgage is concerned, two issues are at play: finances and emotions. Financially speaking, paying off your mortgage can save you thousands — even hundreds of thousands — of dollars in interest payments. But mortgage debt typically comes cheap, especially when you factor in the tax break on the interest. Consider that for someone in the 28% tax bracket, the after-tax rate on a 6% mortgage is a mere 4.3%. Chances are you could do much better than that by investing long-term in the stock market, even after you ante up to the IRS. Paying off your mortgage also doesn’t make sense if you’re simply going to turn around and tap that equity to fund your new career.
But if paying off your debt gives you the confidence and the cash flow to set out on your own, it’s not a terrible idea to pay off your loan. As the housing mess of the past year has shown, living debt-free certainly has its perks.
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