This is a question we are frequently asked. The answer is typically subjective and the list of variables to consider is seemingly endless, but there are a few things to be mindful of if you are entertaining the idea of paying off your mortgage early.
Before delving any further into the issue, let’s make sure a few of the basics are squared away first:
1. If applicable, make sure you contribute enough to employer-sponsored retirement plans to get the full employer match. A 50% match is a 50% guaranteed return on your money – you can’t beat it.
2. Make sure high interest credit cards and other revolving debt are paid down. Chances are, if you have any, this debt is accruing at a higher rate than that of your mortgage.
3. Make certain you have adequate emergency funds in place. Consider four to five months of living expenses as a minimum cash reserve.
4. Confirm your insurance coverage is adequate. Life, disability, and long-term care likely have an important role in your risk management plan. You don’t want to skip disability coverage to prepay your mortgage, only to wind up losing your house.
Once you have checked the preceding items off the list, some other variables to consider include:
Rates of return. Common sense tells us that if we earn a rate of return on an investment that is greater than the interest rate on a mortgage, we are better off investing rather than paying down debt. However, keep in mind that prepaying a mortgage is a guaranteed return unlike most investments that have inherent risk.
Deducting Interest. The deductibility of mortgage interest can be valuable, especially for those taxpayers in higher tax brackets. A 6% mortgage actually costs as little as 3.54% for someone in the 41% tax bracket (35% Federal +6% State). However, the age of your mortgage determines how much interest you can deduct. Prepaying a newer mortgage is more advantageous than prepaying a mortgage with only a few years remaining. The mortgage deduction is advantageous, but don’t overestimate it.
If you are still unsure of the best of approach or would like to have us take a look at your situation, please call us at 404-874-6244.