31 Mar What’s the best place to keep cash I will use to pay off mortgage?

Q. We have 14 years and $270,000 left on our 20-year mortgage. I plan on paying off the loan in about five years but rather than send the bank a little more money each month or year, I’d rather keep it working for me until I have an amount that’s equal to the outstanding loan amount. I don’t see the point in letting the bank have access to the money beforehand. Right now I’m keeping these funds in an online bank earning 0.40%. Is there a better place to keep this money and earn some kind of yield without too much risk?
— Planning

A. Paying off a mortgage early can indeed be a wise strategy when it comes to saving on the interest that you are paying on the loan.

But it’s not right for everyone.

“Even though you may get a tax deduction on the interest payment, the amount you lose in tax savings will usually pale in comparison,” said Claudia Mott, a certified financial planner with Epona Financial Solutions in Basking Ridge. “Please be sure that you have read through your mortgage document regarding the prepayment of the loan so that you are familiar with any restrictions, requirements or penalties that may be written into the contract.”

She said using a mortgage amortization calculator will help you determine exactly how much savings needs to be available when you are ready to close out the loan.

These tools can be found online and require you to input information about the loan including the original amount, date it was issued and interest rate, she said.

“With the goal of making a lump sum payment in five years, the money you are saving really can’t afford to be placed in an investment alternative that involves risk such as a mutual fund, exchange traded fund (ETF), stock or even a bond,” Mott said. “While five years may not seem like a short-term goal, should the stock market correct or interest rates begin to increase, the loss of principal in the investments is going to derail your plans and you may not be able to recoup the loss by the time you are ready to make the prepayment.”

Today’s low interest rate environment is indeed a frustrating one when it comes helping savings dollars earn interest and grow. High yield savings accounts, most of which are provided through online banks, offer rates that are higher than can be found locally, Mott said.

Certificates of Deposit would be another alternative to consider and again, shopping online is going to yield the most attractive interest rates.

“Creating a ladder of CDs by purchasing a portion of the savings in different maturities will help you capture the slightly higher rates that come with longer terms,” she said. “The advantage of a CD ladder comes at maturity when you can reassess the rate environment and roll the money over into a new contract to take advantage of prevailing rates.”

As long as the bank you are using is FDIC-insured, there is no better place currently to keep your money liquid and safe, without any risk, said Victor Cannillo, founder of Baron Financial Group in Fair Lawn.

“A 0.40% interest rate is very good in this current environment,” he said.

Before you make any decisions, Canillo said you should consider the interest rate on your existing mortgage.

“Rates are currently at all-time lows, so one option might be refinancing your mortgage into a new 15-year fixed-rate mortgage, depending on the breakeven and how long you intend to live in the home,” he said.

If your mortgage rate is competitive, another option is not to prepay the existing mortgage and put the money into a diversified strategy, he said.

“This allows you to have another bucket of money and access to liquidity if there is ever an income interruption,” he said. “Remember the bank will not likely lend you money if you should need it, if you are unemployed.”

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This story was originally published on March 31, 2021.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.