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Searching for A Hot Investment? Try Your Mortgage.
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· I can't afford to lose the tax break. Certainly, the real return on a dollar used to pay off a 6 percent interest mortgage early is reduced by the tax break you give up. For example, if your interest rate is 6 percent and your tax bracket is 28 percent, your after-tax return is just 4.32 percent. (Couples with adjusted gross incomes of $159,950, or $79,975 for individuals, will see some of their deductions phased out in 2008.) But tax deductions don't cover all the money you spend on interest. You'll keep more dollars if you spend less on the mortgage.
· I can make more investing in the stock market. But you can also lose money in the stock market. I'm not saying you should abandon stock investing, whether through individual shares or mutual funds. But wise investors know not to put all their money there, especially as retirement draws near. You need time -- years and years -- to ride out stock market slumps such as the one we've been experiencing this year. Mortgage prepayment is one of the strategies you can use to protect some of your wealth against wild swings in stock prices.
· I don't want to retire in this home, anyway. Nothing says you can't sell a paid-off home. Having a bigger stash of home equity after the sale will give you more choices about where you live in retirement, not fewer. You can sell and downsize to a smaller place or a less-expensive area. Or you might wish to retire to a feature-laden home in a resort-like community. A big stash of home equity will make that goal easier to achieve.
· I don't want to invest more money in a depreciating asset. No matter what happens to home prices, prepayment does not increase your investment in real estate. You're simply reducing debt. The amount of money you decided to invest was set the day you bought the home or signed a remodeling contract. Prepayment builds equity, even if the value of your home is lower than it was in 2005 or 2006, when prices peaked.
The argument in favor of mortgage prepayment that I have found most compelling has come from retirees who live mortgage-free. I have never heard one bemoan the loss of that monthly payment.
E-mail Elizabeth Razzi atrazzie@washpost.com
