Managing Credit and Debt

Should I try to pay off my mortgage more quickly?

It’s hard to imagine anything more satisfying that writing that last check to your bank and owning your home free and clear. For most of us, however, that satisfaction is better gained elsewhere. “Paying down your mortgage should really be the last thing on your list,” says New York City financial planner Annette Clearwaters.

Certainly, it makes no sense to pour all your cash into paying off a mortgage if you have other debt. Mortgages tend to have lower interest rates than other debt, and you may deduct the interest you pay on the first $1 million of a mortgage loan.

Even if you are otherwise debt-free, however, you’ll likely reap more benefits investing your money elsewhere. For example, if you have a mortgage at a 4% rate and you are in the 25% federal and 5% state tax brackets, then your mortgage only costs you 2.8% after taxes. Over the long haul, you’d likely top that gain even with a conservatively-invested stock and bond portfolio.

The exception? If you’re almost or fully retired and you’ve held your loan for a long time. You probably aren’t reaping much tax benefit; as you near the end of your loan, most of your money goes towards paying down your principal, which isn’t tax-deductible. Plus, many retirees also move into lower tax bracket, which decreases the benefit further. Moreover, once you retire, you’ll likely be living on a fixed income, making the payments more challenging. In that case, it may be worth putting your money into the mortgage, especially if you would otherwise park that cash into low-yielding CDs.

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