Paying off different debts

Q. Our home mortgage is fixed at 6 percent interest, and we're considering paying extra principal and paying it off faster. We have credit-card debt and a home equity loan at higher rates. Would it be better to pay off the house first or the credit card and home equity loan, or invest the extra money into a retirement savings account?

A.

Paying off your credit-card debt should be your first financial priority. Because the interest on that loan is relatively high (as it is on consumer loans in general) and is not tax-deductible, you should not be paying off your mortgage or home equity loan first.

After paying off your consumer debt, compare the interest rate on the home equity loan to what your expected return might be investing money in a retirement account. For example, if you're paying 8 percent on the home equity loan, do you think you can earn more than 8 percent on average annually by investing additionally for retirement? (You can largely ignore tax issues if the home-improvement loan is tax-deductible, because your investment returns are ultimately taxable.)

With such an attractive interest rate on your mortgage, you might think longer before trying to pay that loan off faster once you get the other two loans paid off. However, if you do wish to be debt-free as soon as possible and don't generally enjoy investing your money for higher returns, by all means, pay off your mortgage in lieu of further saving and investing than you're already doing.

Q.

I have a friend who I would like to leave my IRA to. She is on Social Security and receives government assistance for her rent. Can I give the IRA to her without it being taken away by some government agency? Also, is it true that I may leave up to $11,000 to anyone else and that no tax would be paid on this transaction?

A.

I don't think you have to worry about your friend having your bequest of money confiscated by a government agency. However, the more assets your friend has may harm her ability to qualify for various types of government aid and/or cause her to owe more tax — which some people think of as confiscation!

You and/or your friend should ask each agency how your friend's inheriting of your IRA would affect her eligibility for housing assistance. You are correct about being able to give up to $11,000 annually to a person (or organization) of your choosing. In fact, you can give up to this amount to each of a number of people and organizations without being taxed on the gift.

That said, if you give away an asset that has appreciated in value from when you originally bought it, the recipient of your gift inherits your tax basis for that asset. In other words, if and when the recipient sells the asset, they would owe tax on the appreciation.

What are people saying about mortgages today:

Rates on 30-year mortgages edged down last week to a seven-month low. Mortgage-giant Freddie Mac reported Thursday that 30-year, fixed-rate mortgages fell to 6.3 percent, down slightly from 6.31 percent two weeks ago. It put rates at the lowest level since they were at 6.24 percent the first week of March.

Bank of Hawaii, Central Pacific Bank, Territorial Savings Bank and Wells Fargo Home Mortgages all cut their 30-year mortgage rates to 5.75 percent this week.

Most people think of a mortgage as a means to an end. After all, you buy a house, not a home loan. But a mortgage is much more than the path to homeownership. It is a financial instrument that must be managed, just like any other financial investment.