Length of mortgage lends reason to pay it off early

Q: I'm 78 years old and have total cash funds of $400,000. I also have a mortgage of $108,000 (at 5.6 percent interest) that has 23 years left on it. My only income is Social Security of $600 a month. Is it wise to pay off the mortgage?
S.C., via e-mail

A: Paying off the mortgage makes some sense to certified financial planner James Sonneborn, of Chatham, N.J. With 23 years to run on your mortgage, he calculates that you're still paying mostly interest and little principal.

While a 5.6 percent mortgage rate looks attractive, he thinks that you're probably in a very low tax bracket and may not be able to take advantage of any tax deduction. And it's unlikely that you're earning 5.6 percent or more on your investments.

Should you need additional cash flow in later years, Mr. Sonneborn says a reverse mortgage can tap into whatever equity you've built in your home.

"These products have evolved quite a bit and are available at more reasonable costs to the consumers," Sonneborn says of such home loans. In the meantime, you'll save on the ongoing interest expense and likely enjoy better monthly cash flow.

Q: What's the purpose of the Federal Reserve lifting interest rates? How does the interest rate affect a national economy?
T.S., via e-mail

A: Simply put, the Federal Reserve Board raises interest rates to control inflation. But if the economy is in a funk it will lower rates, aiming to stimulate economic activity, says Michael Church, portfolio manager at Church Capital Management in Yardley, Pa.

The Fed doesn't actually tell banks where to set interest charges. But it influences their behavior by controlling the Federal Funds rate, which is the interest that a depository institution levies against another for any loan it may make to it on an overnight basis.

The Federal Reserve's monetary policy committee, called the Federal Open Market Committee, or FOMC, is in charge here. It meets eight times a year and sets a target rate of interest that it wants, which in turn will influence inflation. If the FOMC is worried that prices are rising too much, it can put the clamps on by raising interest rates. If it wants to encourage business activity, Mr. Church says that it lowers interest rates in hopes that borrowers will come forward.

The basic goal of the Fed is to maintain steady economic growth without the nasty side effects of inflation.

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