Matthew Pillmore
Disclaimer: I am not a lawyer or an accountant. Nothing here should be construed as professional advice. I suggest that you always retain the services of a competent professional to provide advice on your transactions.
If you have a loan on your primary residence and/or rentals, you may have considered whether it would be worthwhile to pay it off ahead of schedule. And if so, you’re not alone.
The debate over whether to prepay your mortgage is perpetual in the personal finance world.
Pay Off Your Mortgage or Invest? The Math Says…
On one side, some experts argue you should NOT prepay your mortgage if you are locked in at a low interest rate. Their reasoning: You would be better off INVESTING your money where a reasonably diversified stock portfolio can expect to earn at a higher rate of return on average over the long run.
Add in the home mortgage interest deduction you can take on your federal taxes and, they say, you would be silly to prepay your mortgage and miss out on those perks.
To this group, the question is just about math. After all, why would you prepay a loan at 3% or 4% and lose out on part of a valuable tax deduction when you could invest that money instead and earn considerably more?
But There’s a VERY Important Side to Prepaying Your Mortgage, Too
Still, there are plenty of experts who forge ahead with their mortgage prepayment plans. My parents (including a CPA father) fell squarely in that category. Instead of taking the standard 30 years to pay off their mortgage, they paid it off in well under 10 years.
Ask him if he cares about the tax deduction they missed out on, and he’ll probably look at you like a crazy person. Why? Because the decision to prepay was never JUST about the math to them; it was about their financial freedom. And math aside, they have never regretted their decision to pay off their home and become entirely debt-free.
Most people agree with that sentiment, eventually. Most, just don’t like debt. It’s as simple as that.
But others prefer a deeper analysis.
Analyzing the Pros and Cons
For starters, let’s take a look at what the home mortgage interest deduction really means.
The easiest way to figure out your home mortgage interest deduction is to look at your effective tax rate. Say your overall tax rate is 22%, for example. On average, the home mortgage interest deduction reduces your taxes by $22 for every $100 you pay in mortgage interest.
That’s a nice perk, but there’s a caveat. Your home mortgage interest deduction is only valid for the amount you deduct over and above the standard deduction, which is available to taxpayers who don’t itemize their returns. The standard deduction for married spouses filing jointly was $12,400 in 2014.
So what does that mean? Simply put, if you don’t itemize your taxes, your home mortgage interest deduction is worth nothing. And even if you do, it’s only worth what it helps you save over the standard deduction that anyone can take. In many cases, this drastically reduces the value of the home mortgage interest deduction to the point where it’s barely worth considering.
But what about those lost investing returns? When you ask people whether or not they prepay their mortgage and why, you’ll find plenty of skeptics who balk at the idea of carrying long-term debt in favor of investing their extra dollars in the stock market. And when it comes to who is “wrong” or “right,” there are several ways to look at it.
The interest you save by prepaying your mortgage is a “sure thing.” Many people are happy prepaying and banking the extra money they save on interest, even if it’s less than they may have earned by investing their extra dollars instead.
A Balanced Approach
As someone who loves leverage but despises (ALL) debt, I see both sides of the issue. And that’s why I personally take (and teach) others to consider a balanced approach.
My only debt includes what is used to advance the assets and income growth of my plan, but is paid back strategically to $0 as quickly and safely as possible. I don’t see the reason to choose between investing extra money OR prepaying my mortgages, so I rely on Debt Weapons™ to do both faster.
What About Debt Weapons™??
Debt Weapons™ are tools that allow any consumer to achieve 1 or more of 7 highly financially beneficial purposes.
1) Maximize Cash Flow
2) Compress Amortization Schedules
3) Replace Inadequate Bank Accounts
4) Invest More Quickly & Safely
5) Minimize Total Interest Costs
6) Enhance & Protect FICO® Credit Scores
7) Quickly Increase Financial Safety and Emergency Reserves
To be clear, VIP Financial Education does not provide or offer Debt Weapons™.
We do the research for our Coaching Members in order to help them decide where to go to get the right Debt Weapons™, at the right time, to accelerate their unique goals.
Just like exercise equipment can injure you when used incorrectly, Debt Weapons™ can also be quite harmful if you access the wrong one or use the right one the wrong way.
Applying for any Debt Weapon™ without knowing the proper questions to ask, can lead to several negative consequences. For example, credit scores can rapidly decline, you could access the wrong Debt Weapon™ for your intended purpose leading to unforeseeable costs and terms, possibly delaying your goals even further.
That seems like a good compromise to me. Still, there is nothing wrong with taking sides on this issue.
When you hate debt, you want to put it behind you once and for all, and that’s understandable. But it’s also understandable for someone to make their decision based solely on the numbers. After all, it’s hard to argue with math. At the end of the day, we all have to do what is best for our families – and what helps us sleep best at night.
So, should you pay off your mortgage quickly? It is, and always has been, up to you so be sure to fully investigate all your options.
