Should you pay off your mortgage early? According to Retire With Money news-letter, that decision depends on your answers to these seven questions:
WHAT'S YOUR RISK TOLERANCE? "On paper, it probably makes more sense to invest money that would otherwise go to paying off your mortgage early. But the decision really boils down to your willingness to live with risk," says RWM."Let's say you have a 30-year $150,000 mortgage at a fixed 7 percent with monthly payments of $998. If you pay an extra $200 to bring your monthly check to $1,198, you'll cut 11 years and $89,292 off your total debt payments. In effect, by prepaying, you'd be investing $200 a month at a 7 percent annual return."
WHAT'S YOUR MORTGAGE INTEREST RATE? The lower the rate, the stronger the argument for keeping your mortgage and investing your money elsewhere, RWM says.
"Bottom line: Homeowners with mortgages at 9 percent or more may come out ahead by paying off their mortgages as soon as possible."
WHAT'S YOUR TAXABLE INCOME? In general, the higher your tax bracket, the lower your after-tax mortgage rate. If you're in the 15 percent bracket, for instance, the government will reimburse you only 15 cents of every dollar you pay in mortgage interest, vs. up to 34 cents in higher brackets.
WHERE DO YOU LIVE? All but four of the states that levy income taxes let you deduct your mortgage interest, reports Retire With Money. The exceptions are Connecticut, Massachusetts, New Jersey and West Virginia.
DO YOU HAVE OTHER DEBTS? Most mortgage rates are lower than those on other loans, even on a pretax basis. If you have outstanding credit card balances, or other nondeductible debts, you're wiser to pay them off first.
HAVE YOU MADE MAXIMUM USE OF TAX-DEFERRED ACCOUNTS? If you're still working, you're better off contributing to a 401 IRA or other tax-advantaged account than paying off your mortgage early, RWM says Retire With Money.
HOW MUCH MORTGAGE INTEREST ARE YOU ACTUALLY PAY-ING? With each payment, less of your money goes for interest and more for repayment of principal, concludes Retire With Money.
"Thus, if your 30-year mortgage is within five years of maturity, your best strategy may be to pay it off early, because your interest deduction is so small."
(Retire With Money, P.O. Box 60001, Tampa, FL 33660-0001; monthly, $49.95)