Coffee heat rising

Pay off the loan vs. stash the cash

About $23,900 is owing on the second mortgage on my home, which I took out at 6.1% to renovate the investment house. I could pay the principal down at the rate of $250 a month plus about $3,500 a semester from a side job, or I could put that money into savings so it would be available to pay off the loan when I retire. Or, if I decide to sell my house (which is otherwise paid for), that amount would refill my pocket after the amount owing on the second is engrossed from the proceeds of the sale.

I figure this will allow me to pay off the mortgage in about two and a half years, or, over the same period, to accrue $25,000 in an interest-bearing account. Either way, the amount put into some kind of investment instrument–real estate or mutual fund–will be about the same.

Which is better? I agonize, I wring my dainty hands:

Item. The payment is very low–less than $170 a month.

Item. Despite the sagging real estate market, neither my house nor the investment house is losing much, because they are both in fairly “hot” central-city neighborhoods. Neither has dropped in value below what we paid; in fact, each has apparently risen somewhat. One is holding its value at about $50,000 to $70,000 more than its 2004 purchase price. The other is within walking distance to but out of earshot from a brand-new light rail route. In comparable cities, housing values have jumped along light rail lines. Barring a major recession, it’s unlikely either house will depreciate significantly.

Item. A major recession is not beyond the realm of possibility. In that case, property values certainly could drop, or worse, my son or I could lose our jobs. If that happened, it would be better to have $25,000 in liquid savings, not tied up in a house I may be unable to sell or even, if I’m unemployed, borrow against.

Item. My son and I plan to sell or rent the investment house in three to five years.

Item. Assuming things go well, I plan to retire in about three years. At that time I will have to decide whether to keep my house, which has much to recommend it, or to move someplace smaller and more economical to operate. If I decide to stay, I could use the $25,000 cash savings to pay off the loan or, at an 8% return, to cover the mortgage payments. If I decide to sell, about $23,000 will disappear from my profit on the house. But the cash savings will make up for it. Either way, it looks like a wash. In three years, I either have 23 grand put back into the house or I have 25 grand invested in a mutual fund.

Personally, I hate having a debt hanging over my head, and I hate paying interest. Even though the payment is low, if it runs the entire life of the loan I’ll end up paying twice as much as I borrowed. Of course, that won’t happen, because the investment house will be sold long before thirty years are up and I’ll pay off the renovation loan with the proceeds. Still, it’s a psychological burden. On the other hand, with the economy unsettled it may be better to stash the money in liquid instruments. Or convert it all to gold bullion and bury it in the backyard.
So: which is better? Keep the money liquid or put it back into real estate by paying off the loan?