The question comes along, normally in retirement, of whether an individual should pay off their mortgage or invest. The reply to this question not merely applies to financial considerations, but to emotional ones as well.
There is certainly an element of pride that accompanies owning your home free and clear. You have spent years attempting to arrive at the point where it is possible to finish up with your mortgage.
There is a great amount of emotional baggage bound to reaching that goal. But what if financial considerations propose that the time is not optimal to pay off your mortgage?
As a way to analyse if working your mortgage is a financially sound decision, you need to calculate the after tax value of your mortgage. In order to perform this, you need to multiply your mortgage interest rate by your marginal tax rate. For example, 6 x 35% = 2.1%. To buy the after tax cost of your mortgage, subtract that number (2.1%) from your interest.
In the case of our example, the reply is 3.9%. If the after tax basis on the investment in your portfolio is expected to be beyond the after tax cost of your mortgage, you should preserve paying your mortgage.
The scale to which you accomplish an after tax investment return over your after tax mortgage hinges upon the risk quotient of your investment strategy. Your investment strategy should have the potential to discuss the after tax cost of your mortgage. If it did not, why would you include the investment risk?
Low priced mortgage debt does have the possibility for higher returns to investors, but it involves risk. Fortunately, many householders have refinanced to rates at historical lows and for people who didn’t, the opportunity still exists to get a 30-year rate under 6%, and a 15-year rate even below that.
If you are considering paying off your mortgage, you will have to have to consider the liquid funds you will employ to do so. It does not add up, from a tax perspective; to use funds from tax deferred savings such as an IRA.
Instead, you will need to use liquid funds from other assets.In the end, the decision to pay off your mortgage or not is a compounding of perspectives as a homeowner, an investor, and somebody who has worked long and hard making the mortgage repayments every month.