Paying off your mortgage early is always tempting, especially when the stock market is volatile. Paying off your mortgage (like any other loan) is an investment, and your return is essentially the interest rate on the loan. If you have 25 years left on a 30 year mortgage with a fixed rate of 6.2% and you deduct the interest payments on your taxes, you'll earn 4.5% by prepaying the loan assuming you're in the 28% tax bracket. If you invest your spare cash in stocks instead, you'll have to pay a 15% tax rate on your long-term capital gains and dividends. So to beat the 4.5% return you'd get from prepaying your mortgage, you'd have to earn just 5.3% a year on your stocks before taxes. The odds of you doing that over the 25 years remaining term of your mortgage are excellent: Historically a portfolio of 80% stocks and 20% bonds has returned 7.5% a year after taxes.
Tools: To see how much interest you'd save by prepaying your mortgage, use the payoff calculator at Dinkytown.net. To run the numbers on how much money you could end up with by investing, use the savings calculator at CNNMoney.com
The Bottom Line: Investing Wins!
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