AKAMAI MONEY

By Deborah Adamson
Advertiser Staff Writer

Q: My current mortgage is approximately $68,000 with a mortgage rate of 4.875 percent, fixed for 15 years. Let's say I have $100,000 in the bank right now. Should I pay off the mortgage or put that $100,000 in a certificate of deposit at the rate of 4.7 APY (annual percentage yield) for five years? I don't trust and like mutual funds or the stock market.

— Jason Jaliko, Mililani Mauka

A: The right move depends on your circumstances. A basic rule of thumb is to choose the option where you can best maximize your money.

Looking at the math alone — a 4.875 percent mortgage rate versus a 4.7 percent interest on a CD — it's better to pay off your mortgage since the mortgage and CD rates are nearly a wash, said Michael Iraha, a certified financial planner in Ho-nolulu.

Even the tax considerations balance out to some degree. You pay less tax when you deduct mortgage interest on your home loan. However, the 4.7 percent APY on your CD is pre-tax. So what you would save with the mortgage tax deduction, you may end up paying anyway as tax on interest from your CD.

As such, you might consider paying off the house and face fewer bills every month.

But if you're willing to take more risk and get into a stock mutual fund, where you can earn about 8 percent a year on average in the long run, then it would make more sense to invest the money instead of paying off the house, he said.

Another reason to pay off your mortgage is if you have a cash flow problem, said Roberta Lee-Driscoll, a certified financial planner in Honolulu. However, once more money is freed up, don't use that as an excuse to overspend and rack up debt.

Remember that once you pay off your house, unless you have other liquid assets, you're tying up a chunk of your savings.

Would the remaining $32,000 be enough for emergencies? One rule of thumb is to set aside three to six months worth of living expenses in an emergency fund, said Greg McBride, financial analyst at Bankrate.com in North Palm Beach, Fla.

Another thing to consider is the length of the CD.

Five years is a long time to lock up your money, especially with interest rates rising, he said. Bank CDs usually assess penalties to withdraw your money before maturity. CDs offered by brokerages may not lock up your funds, but you risk losing part of your capital if you don't hold until maturity because the amount in your account fluctuates with interest rates.

If you still feel more comfortable putting your money in a CD but want access to at least part of your capital, consider a strategy called laddering.

You could divide your $100,000 into five pots of $20,000 each, McBride said. Put the first $20,000 into a one-year CD, the next $20,000 in a two-year CD, the third $20,000 in a three-year CD, the fourth $20,000 in a four-year CD and the last $20,000 in a five-year CD.

When the one-year CD matures, open a new 5-year CD account. As the others come due, continue investing in five-year CDs.

The result: When the one-year CD matures, the two-year CD would have only one year left and the three-year CD would have two, and so on. The five year CD would then have four years left so there's a spot on the rung for your new 5-year CD.

By doing so, you have access to $20,000 every year and as interest rates rise, you'll put that money into a higher-yielding CD.

Reach Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.