Harry Gross: Always good to ease wife's concerns

Dear Harry:

We have a $37,000 mortgage left on a rental property that we own. The rental covers this very handily. My wife has always been afraid of debt of any kind, so she wants me to pay off the mortgage from our money-market account. This would still leave us with a large enough emergency fund in the account. Recently, I saw an article that clearly showed that prepayment is not a good idea because you can get a better return on your money in the highest-rated corporate bonds. Would you prefer the "middle ground" of paying a couple of months extra principal?

What Harry says: Someone sent me a copy of what might have been the same article you read. He noted in his letter that the author apparently did not consider that the interest earned on the bonds was taxable. You did not give me the rate on your mortgage, so I'll have to make an assumption that it's not less than 5 percent. In today's market, you can probably get the best corporate bonds for about the same rate. U.S. bonds are going for considerably less. What about the fact that your mortgage interest is tax-deductible? It is, but the interest on those bonds is taxable wiping out that presumed advantage. Paying off the mortgage has the psychological advantage of easing your wife's concerns, too. That trumps the "middle ground" you suggested. Once that debt is paid, you can use the money saved on payments to invest elsewhere.

Write Harry Gross c/o the Daily News, 400 N. Broad St., Philadelphia, PA 19130. Harry urges all his readers to give blood - contact the American Red Cross at 800-GIVE LIFE.