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Ask The Experts: What's Wrong With Prepaying My Mortgage?

Q. Carmen,

First let me say that I love you and love your show. The other night you had a caller ask about trying to pay off their mortgage early and you and your guest in unison screamed, "Nooooo!" Are you against paying off a mortgage early? If so why?

To me it makes a lot of sense, because a taking a 30 year mortgage to term would cause them to pay 3x what they borrowed. If they doubled their monthly payment however they could pay the note off in 7 years. Fear of the "tax man" is no reason to throw away that much extra money. Once the mortgage is paid off, that gives them that much additional cash flow to put towards savings and investments. That makes a lot of sense. And if the only reason to not pay off a mortgage is for the tax break, Why not start a business, or invest in real estate to get some deductions there?

It doesn't make sense to throw away money because the government gives you a little bitty tax break. I think this option should also be presented to your audience and let them decide what is right for them. Thanks. -Chris, TX

A. This one is not all about the taxman. It’s about putting money into a market. Your home is not an asset like a car where you pay a certain amount, it depreciates, you pay it off and you’re done. It acts more like an investment that you’ve borrowed money to invest in. It not only has intrinsic value, it (hopefully, eventually) will go up in value, and sometimes, as we’re experiencing, it goes down in value—a lot. It also has value beyond money—you live in it. It allows you to be comfortable while you work and live your life. It’s also vulnerable to wild market swings, as we’re experiencing, and the national average return on home value is incredibly low for an investment—somewhere between 3 and 5 percent.

Granted, like any investment, if you buy very low and sell at the height of a bubble, good for you. However, the odds are that your money will serve you better—worth repeating: your money will serve you better—by paying off credit card debt, saving up an emergency fund that will help you avoid losing your home should you lose your job, or growing in a well-diversified retirement portfolio which should earn you a conservative average of 8 percent over at least 20 years. One of our CFPs did his own calculations projected out over 30 years and he found that investing in the market beat prepaying your mortgage by a cool $1 million. And yes, if you can claim the tax deduction on the mortgage interest, all the better.

Here’s why I don’t present this option to our audience: I am all about making your money work harder and better for you, so you can live the life you want to live. Prepaying your mortgage may make you feel better, but not prepaying your mortgage is more likely to enable you to live better.

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Carmen Wong Ulrich is the host of On The Money