Here's how it would work for a $350,000 mortgage: The national average rates are 3.92 percent for a 30-year fixed loan and 3.19 percent for a five-year adjustable-rate mortgage, which is repaid over the same 30 years. The payment is $1,655 for the fixed-rate loan and $1,512 for the ARM.
At the 4.4 percent average dividend rate for the five highest-yielding Dogs, putting $350,000 of liquid assets aside and devoting the income from them to paying the mortgage generates about $1,283 a month. Throw in the tax savings — dividend income is taxed at 15 percent, while the mortgage-interest deduction saves most upper-income investors at least a quarter of the interest they pay — and it comes close to even.
Greg McBride, chief financial analyst at Bankrate.com, said, "This is but one illustration of why pouring extra money into paying down, or avoiding having to take, a low fixed-rate tax-deductible mortgage is not the optimal financial move. "Often, in fact, it limits the homeowner's financial flexibility as you can't get to money tied up in home equity if you need it."
Put another way, it makes sense to keep a mortgage — even if you can afford to pay it off — to get the tax benefit, and to have the financial flexibility of knowing the amount of cash and liquid investments you would need to pay off your mortgage is still available if you hit a rough patch, like job loss.