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Friday, 29 January 2016 07:58

6 Things to Consider Before Paying Off a Mortgage Early

Written by AMREF SACCO 
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Directing excess cash towards paying down a mortgage.

Living debt-free sounds great, and depending on where you are in life it may actually be attainable. But even if you can pay off your mortgage early, should you? Although it may be tempting, first consider the opportunity cost of paying off your mortgage early at the expense of other goals or investment options, as well as the impact to your tax situation. 

 

By paying off your mortgage early, you'll save on the additional interest expense that would have been incurred in your regular payments. This savings can be significant, and will increase with the prepayment amount.

However, by directing excess cash towards paying down a mortgage, those funds are no longer available for investment. The lower your interest rate, the less you stand to benefit through early retirement of debt.

How can you decide whether it is best to invest excess cash or pay off your mortgage early? Consider the following example: Suppose the stated interest rate on your mortgage is 4 percent and you are in the 28 percent federal income tax bracket.

Your after-tax mortgage rate is roughly 2.9 percent, perhaps lower if you can also deduct the mortgage interest on your state income tax return. For many investors, investment portfolios are constructed using a risk tolerance that carries a much higher annualized expected investment return than 2.9 percent.

For some, the "guaranteed" 2.9 percent savings is more attractive than a higher expected market return, subject to greater volatility and risk. For those with a much higher after-tax mortgage rate, paying off a mortgage early likely becomes a more attractive option.

Read 1994 times Last modified on Friday, 29 January 2016 08:07

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