Monday, November 8, 2010

Should I pay off my mortgage?

It seems intuitive that paying off your mortgage as soon as possible is a great financial move, but according to a recent New York Times article, that's an assumption you should reconsider.

Sure, the faster you pay off your mortgage on your Ann Arbor home, the less interest you have to pay and the more cash you have on hand day-to-day. Plus sending in that final payment takes a huge burden off your shoulders. But while living debt-free is a worthy goal, at the end of the day it might actually cost you more.

Skeptical? Think about it this way:

"If you have, say, a 30-year fixed-rate mortgage for $400,000, taken out this month at 4.25 percent, then paying $200 a month on top of your monthly payment of just under $1,968 (for interest and principal) would save you $58,496 in interest and shave five full years off your loan.

Appealing? Yes. But is it worth it?

Because of the mortgage-interest deduction, that $58,496 is really costing you $42,117, assuming you’re in a 28 percent federal income tax bracket. So that 4.25 percent rate is really better seen as 3.06 percent."

So the question is whether that $200 a month can earn you more in investments then it will save you in interest payments.

And the answer is ... it all depends! The market is fickle, but according to the article, is doing better this year. Alternatively, there are many other ways to make your dollars stretch farther, like paying off high-interest credit card debt, or refinancing a loan with high interest, though these savings can be off-set by the fees charged.

“People look at things in black and white,” Mr. Lose, a certified financial planner stated, “and I see a lot of people who say they want to be debt-free. So they plow money into their house, but don’t save as much. But I hate to see all your assets wrapped up in the equity of your house.”

Never forget to be prepared for an emergency - losing a job or finding yourself in an emergency is scary, especially if you don't have cash that you can access, such as that invested in a home.

Read the full New York Times article.

1 comment:

  1. Money that cheap is going to be hard to find in the future. People have the vast majority of their asset value tied up in their housing. The problem is that you don't have this money available for use during retirement. If you are young, use the extra money to build up some liquid assets. If you are not so young, it may be a good idea to have no mortgage payments when you retire and are on a fixed income.