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Ask the Experts: Don’t Gamble Funds Earmarked for Mortgage

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By Claudia Buck

(MCT)—Where’s the best place to park money to pay off a mortgage? Should elderly parents cancel their credit cards?

This week, those questions get answered by Walt Romatowski, certified financial planner with Castellan Financial Advisors in Roseville, Calif.

As one of our “Ask the Experts” contributors, Romatowski answers readers’ personal finance questions.

QUESTION: I recently received $125,000 from a trust settlement. I want to invest it for about four years and then use the funds to pay off my mortgage when I will be 65 and retiring. Any ideas on where to place the money?

ANSWER: If you are set on using the $125,000 to pay off your mortgage when you retire in four years, you should not invest it in anything that could result in a loss of principal.

Unfortunately, in today’s economy, you will not be able to earn much without taking on the risk that is typically associated with financial markets, e.g., stocks, bonds, mutual funds and ETFs.

Your options include higher-yielding savings and money market accounts, CDs or Treasury bills. Check out Bankrate.com for the best available rates.

Don’t be afraid of online banks. The important factor is that the bank you choose is FDIC-insured.

If you invest in CDs, construct a CD ladder, i.e., split up your $125,000 into various maturities, such as six months, one year, two years, etc. Just watch out for early redemption penalties as you get closer to the end of the four-year period. In other words, don’t cash in the CDs before they reach maturity.

Since you will not earn much on the investments listed above, consider paying off your mortgage gradually by increasing your normal monthly payments. When making these payments, indicate to your lender that the additional funds are to be applied to the principal.

Q: My parents are in their 80s and have a number of credit cards, some of which charge an annual fee. I want them to get rid of most of the cards. (There are zero balances on all.) My parents think it will hurt their credit rating if they cancel the cards. I told them it would not matter: Their house and car are paid off, they have no loans and are not anticipating buying anything expensive. They have never had a bankruptcy, loan defaults or late payments on anything. What do you think?

A: Your parents may not have any debt or impending major purchases, but there are times when a credit card is useful, such as guaranteeing a hotel room or rental car, making an unexpected purchase, applying for a loan to help out a grandchild, etc.

Suggest that they limit themselves to one or two major cards, preferably ones they have used for a number of years, to preserve their credit history, and ones that don’t charge annual fees.

Canceling credit cards can lower a credit score, but it sounds like your parents have a strong credit history, so doing so shouldn’t have a severe impact on them.

©2012 The Sacramento Bee (Sacramento, Calif.)
Distributed by MCT Information Services

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