blog post July 19, 2018
If you have a mortgage on your home, you probably wonder whether paying it down ahead of schedule is the best-case scenario. The truth is, there are tons of people that are in the same situation.
On top of this, there is a big debate over whether to pay your mortgage early, before retirement or as soon as possible in the finance world. The good news is that there are many pros and cons of each option.
Plus, there is a major psychological component you need to consider when making a choice based on your unique circumstances.
Pay Your Mortgage Early – Or Invest Your Money?
This is one of the questions that bother many homeowners. The truth is, paying your mortgage early is good because it gives you peace of mind. Just like that, investing your extra money can also give you more money in the future and additional comfort.
So, what to do?
According to experts, you are better off investing your money in the stock market with a diversified stock portfolio. This, according to some research, can give you at least 7% in earnings over the course of a decade.
It’s simple – you wouldn’t want to pay down a mortgage at a 4% APR rate when you can earn more by investing in stocks and bonds – right?
Still, there is another side of the story, which is often the one that leads to early payments. We are talking about the emotional side of prepaying your mortgage.
Early Mortgage Prepayment = Financial Freedom?
There are many people who ignore this math and forge with their mortgage prepayment plans. For example, instead of taking the standard 30 years for the mortgage repayment they do it in less than 20 years.
When asked about the tax deduction, this is not the smartest decision one can make. However, people just don’t like debt – and most of them want to get rid of their mortgages, loans, and debts when having the money.
What To Do?
As we said earlier, one must make most of their unique circumstances and make a decision.
One of the easiest ways to figure out what the home mortgage interest deduction of your home is – is by basically looking at your effective tax rate.
For example, if your overall tax rate is 22%, it basically means that the home mortgage interest deduction reduces your taxes by $22 for every $100 that you pay in mortgage interest.
Still, there is a caveat. Your home mortgage interest deduction, in this case, is only valid for the amount that is deducted over and above your standard deduction. As of 2018, there is a $24,000 standard deduction for married couples and $12,000 for individuals.
In other words, this means that a higher standard deduction will make fewer people itemize their taxes.
A Balanced Approach
Most of the homeowners nowadays love math – but despise debt. This is what makes them see both sides of the story. And this is why our advice is to take a balanced approach when it comes to your mortgage.
In other words, you should max out your retirement accounts first and foremost – and then threw in an extra few hundred dollars in your mortgage every month. This way, you will both pay out your home off faster (and easier) but also be able to save or earn some money with your investments.
At the end of the day, it is up to you to decide how to approach your home mortgage debt. If you want to put it behind you once and for all, that is understandable too – just like it is understandable to make most of the numbers.