Should I Pay Down My Mortgage Every Month and Try to Pay off My Mortgage?
Should I pay down my mortgage every month and try to pay off my mortgage?
There are different schools of thought and the right decision depends on your financial situation. It used to be that your parents would tell you to pay down your mortgage as fast as possible. You can be debt free and no longer have monthly payments. It’s more complicated than that. With today’s low mortgage interest rates, you may get a higher return on your money in other investments or perhaps you need a tax write off or you can use your money to leverage to buy other properties.
TAX BRACKET AND WRITE OFF
What is your tax bracket? If you are in a high tax bracket, you may need a write off. For example, if you are in a 25% federal tax bracket and you have $20,000 in mortgage interest, you can get a $5000 break on their federal income tax for the interest. If your state income tax is 7%, that tax break grows to $6,600.
A write off alone is not a reason to keep a mortgage. Everyone gets a standard deduction. If you are married, filing filing jointly, your standard deduction is $12,400 for 2014 ($6,200 for single taxpayers). For your mortgage to bring you a tax benefit, you have to have deductions above your standard deduction. If the interest on your mortgage is less than the standard deduction, you aren’t getting any additional tax benefit. (Note: This is not intended to be tax advice. Please consult your tax specialist for guidance specific to your situation.)
RETIREMENT
If you are paying off your mortgage instead of investing with a higher return or putting it in your retirement IRAs/401k which may have a company match, you are giving up valuable free money. If you have a company match and you are not taking advantage of the match, it is a 50% return on every dollar matched versus the mortgage interest rate (ie. 4.5%).
INVESTMENTS
Also, what is your typical return on your investment. That investment also has a compounding effect where you earn interest on your interest. The average rate of return in the stock market is approximately 8%. Investors can look for stocks that pay dividends to provide income that exceed the mortgage interest. When you get a better return than your mortgage rate from your investments, it may not make sense to pay off debt with low interest.
CASH FLOW
Once you pay off your mortgage, it may be difficult to get money out to pay for unexpected expenses. In order to get money out of a property, you need to qualify for a home equity line of credit, reverse mortgage or to sell the house.
Janice Lee
415-832-9151
JaniceFLee@gmail.com
www.JaniceLeeHomes.com
BRE #01720205
There are different schools of thought and the right decision depends on your financial situation. It used to be that your parents would tell you to pay down your mortgage as fast as possible. You can be debt free and no longer have monthly payments. It’s more complicated than that. With today’s low mortgage interest rates, you may get a higher return on your money in other investments or perhaps you need a tax write off or you can use your money to leverage to buy other properties.
TAX BRACKET AND WRITE OFF
What is your tax bracket? If you are in a high tax bracket, you may need a write off. For example, if you are in a 25% federal tax bracket and you have $20,000 in mortgage interest, you can get a $5000 break on their federal income tax for the interest. If your state income tax is 7%, that tax break grows to $6,600.
A write off alone is not a reason to keep a mortgage. Everyone gets a standard deduction. If you are married, filing filing jointly, your standard deduction is $12,400 for 2014 ($6,200 for single taxpayers). For your mortgage to bring you a tax benefit, you have to have deductions above your standard deduction. If the interest on your mortgage is less than the standard deduction, you aren’t getting any additional tax benefit. (Note: This is not intended to be tax advice. Please consult your tax specialist for guidance specific to your situation.)
RETIREMENT
If you are paying off your mortgage instead of investing with a higher return or putting it in your retirement IRAs/401k which may have a company match, you are giving up valuable free money. If you have a company match and you are not taking advantage of the match, it is a 50% return on every dollar matched versus the mortgage interest rate (ie. 4.5%).
INVESTMENTS
Also, what is your typical return on your investment. That investment also has a compounding effect where you earn interest on your interest. The average rate of return in the stock market is approximately 8%. Investors can look for stocks that pay dividends to provide income that exceed the mortgage interest. When you get a better return than your mortgage rate from your investments, it may not make sense to pay off debt with low interest.
CASH FLOW
Once you pay off your mortgage, it may be difficult to get money out to pay for unexpected expenses. In order to get money out of a property, you need to qualify for a home equity line of credit, reverse mortgage or to sell the house.
Janice Lee
415-832-9151
JaniceFLee@gmail.com
www.JaniceLeeHomes.com
BRE #01720205
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