Pay Off That Mortgage or Save?It Depends
Should you pay off your mortgage or pump up your savings and investments? Every situation is different. Assess these four things to help make your decision:
1. Risk tolerance
What may seem like an adventure on the wild side for you may be a country stroll for someone else. If you’re willing to gamble, it may be possible to earn a higher rate of return with an investment over the long term than by paying off your mortgage.
You may want to keep your mortgage if your after-tax interest rate—what your mortgage really costs after you factor in your income tax deduction, if any—is lower than the expected after-tax returns from your savings and investments.
In an oversimplified example, say you’re in the 28% tax bracket and can itemize your deductions. In this example, a 7.5% mortgage rate actually costs about 5.4%. That’s the figure an investment would have to beat for you to come out ahead by paying off your mortgage.
Remember, too, that you’llowe taxeson dividends and interest you earn on savings vehicles. Say you can earn a yield of 4% and are in that 28% tax bracket—your effective earning rate is actually more like 2.88%.
2. Financial situation
You should increase your savings stockpile and stop worrying about paying off the mortgage if you’re strapped for cash, in a precarious job situation or relationship, have health issues, or are uncertain about your finances for whatever reason.
3.Savings
Most consumers lack adequate savings for contingencies like job loss. Putting money in savings, even with today’s very low returns, may be better than paying down a mortgage. Paying down might result in a better ’return‘ than an alternative investment, but houses aren’t liquid—they aren’t a source of immediate cash—especially in today’s market. Use our Emergency Savings calculator to determine how much you should have in savings.
4. Life stage
If you’re near retirement, the idea of paying off your home can be comforting. After all, while you can live off a savings account, money market, mutual fund, or equity investment, you sure can’t live in one.
Paying off your mortgage before you retire is a good idea only if you have sufficient liquidity to do so. But, just because you have the liquidity to pay off your mortgage, should you?
Some advisers say it might be a better move not to pay down or pay off your mortgage depending, again, on the rate you’re paying. Mortgage rates are at historic lows, averaging less than 5% for both 30-year and 15-year terms in early 2011.
Don’t even think about paying off your mortgage or putting that money into potentially higher earning investments if you have credit card debt. Get rid of that first. Learn more about paying down debt
If you’re working and are lucky enough to have a 401(k) account with an employer match, make sure you are taking full advantage of that savings vehicle. Then, if you are still looking at education expenses for your children, consider putting your extra money into a 529 college savings plan.
It doesn’t have to be one or the other
If you have the liquidity but want to preserve flexibility, you can pay down your principal with an extra—and optional—$100 or $200 a month. Just make sure your lender applies any extra payments you make to the principal.
Decide what will make you rest easy at night and make your move. Just be sure you’ve planned for contingencies.
Contact an Advantis Mortgage Expert Today
Enjoy the expert guidance of a local Advantis Mortgage Officer. From application through closing, our specialists can answer any questions you may have and help you find the best loan to fit your needs. Call 503-785-2528 orapply now online.
