Should You Pay Off The House?
Mortgage debt used to be no big deal when we were making money in real estate and the stock market. Now people wonder if they ought to go ahead and get rid of that house payment.
If you are part of a young family, then paying down the balance may feel right. If you are approaching retirement and have just a few payments left, then you might be considering paying them off. We all know that mortgage interest is tax-deductible, but often stocks will get you a better return.
Here are some questions to ask yourself when deciding what's best for you.
1. Are other debts a priority?
Yes, especially if you have credit card debt, or you are unable to max out your 401k. You should also have a minimum of 6 months living expenses in saving. Today it is extremely difficult to pull equity from your home. Being prepared in case of job loss is crucial.
Retirees who plan to pay off the mortgage in a lump sum must have adequate savings for emergencies. It's difficult to get an equity line without having a first mortgage.
2. How long will you stay in your home?
If your plan is to move to a larger home (or a smaller on) in the next 5 years, it doesn't make good sense to put additional dollars into the mortgage.
3. What does the interest tax deduction do for you?
If you itemize your deductions, multiply the mortgage interest paid by your tax rate (Federal + State). A married couple in the 28% tax bracket with a $200,000 loan at 5%, will save $2781 in taxes in the first year of a loan. You MUST check with your tax adviser! The amount of tax savings declines the further you get into the loan.
4. How should you invest your money if you don't use it to pay off the mortgage?
Stocks and bonds have been shown to get a higher rate of return. If you itemize, multiply your mortgage rate and tax rate, then subtract the number from your mortgage rate. You can do this with a mortgage calculator.
Contact Michael and Irene for more information.