I asked my financial advisor, Karl Johnson, this question since it's one my wife and I have discussed. Do we put at least one extra payment per year to our mortgage or invest the money instead? We have a fixed 6% 30-year mortgage (and I'm happy with that). We've had it for 4 years now. Also, the value of our home soared in the last several years. So we have about 70% equity.
Here are the two sides to the issue:
One side says get the tax deduction so don't pay off your mortgage early.
The other side says pay off the mortgage if you pay $1 in interest to get $00.25 cents in a deduction (depending on your tax bracket).
This is how Karl looked at the issue:
"It depends on the interest rate on your mortgage, adjusted for taxes, if it is significantly less than an 8% to 10% return you can get in an investment - even a mutual fund.
"Realize the mortgage is a fixed commitment while the investment is not guaranteed. However, getting an 8% return over the long term for an investment is not difficult.
"Let's say you have a fixed mortgage at 6% and you're in the 25% tax bracket so you subtract 1.5 for a tax deduction.
"You have a 4.5% rate.
"Now, you invest and get a return of 8% . . . subtract the 4.5% and you're left with a gain of 3.5%.
"If you're not paying off the mortgage early then you should invest the money at a moderate risk. You have to be prudent about the investment vehicle.
"The average person should be cautious. Someone who has an adjustable rate mortgage can err on the side of paying off the mortgage early.
"I'm an investor, not a speculator."
In my next post, Karl talks about what he looks for in an investment vehicle.
3 comments:
Good Post. Thanks for the Information.
Love & Gratitude,
Tina
Think Simple. Be Decisive.
Gidday Don!
We didn't have a choice. With young kids early on in our marriage, the constant big phone, electicity and food bills, took most of what we had. Then we had the mortgage on top of that.
During the 90's the home interest rate in Australia rate shot up to 18%. Many lost their homes or had to re-finance.
We were lucky, though. We had been locked into a fixed interest rate. This saved our bacon.
At present even though the interest rate may drop slightly below our interest rate, the peace of mind (taking into account the past history mentioned above) of the fixed interest rate agrees with us.
Even later on in life it is a hard task to save money. But going into our 50's, things are a little easier (the kids have moved out) and the wife and I can get some quality time with a little bit more money to help things along. Not much, but enough.
P.S. If you want to save money throw away your kids cell phones and put restrictions on the home phone.
Regards
Peter McCartney
Sydney Australia
Tina and Peter, thank you for your comments. Wow, the interest rate in Australia hit 18%! Thankfully, you had a fixed mortgage!
And, yes, I agree with throwing away the kids' cell phones. Unfortunately, that's not how the kids always see it!
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