My advice to people who are trying to decide whether to pay off or pay down their mortgage from savings or investments is to consider what they’re earning on their investments after-tax and compare that to what they’re paying after-tax on their mortgage.
This point of view assumes that you can take full advantage of the mortgage interest deduction. Use a mortgage deduction calculator to determine the after tax mortgage rate. If the rate you are paying on your mortgage is less than you are earning the answer is clear, do not use your stocks or savings to pay down the mortgage. If the reverse is true and you are earning less on your investments than you are paying on your mortgage than go ahead and use the money to pay down your mortgage.
Mortgage Deduction Calculators
There’s a rub. No one knows for sure what stocks will return in the future. Trading off the uncertain stock returns for certain mortgage interest savings is tempting. If you are in your 30’s or 40’s you have plenty of time to pay off the mortgage prior to retirement. Staying invested in stocks for another 30 years could provide solid returns in your portfolio.
A change in tax policies, both for capital gains taxes and in estate taxes, could factor into your decision whether to sell your stocks. Ideally, the government will give enough notice for people to plan for, versus react to, any changes.
Additional principal payments over time can help you chip away at your mortgage balance. I’d choose that approach — and not liquidating your investment portfolio — if you want to shorten up the effective term of your mortgage.
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