Everybody wants to enter into investments safely.
But, low risk also means low returns.
Today big banks only offer 2.
4% APY for a five-year certificate of deposit and 1.
5% for five year Treasury.
But there is one investment that gives a better yield and offers incentive of a lower retirement expense: paying down your mortgage.
Deduct mortgage interest, which runs from 4.
5% to 7%, by getting the difference of your tax bracket (for example 25% to.
25) in decimal form from 1 (.
75), multiplied by the mortgage rate (result is 3.
375% to 5.
25%).
A lower retirement expense also requires less income, which in turn requires lesser retirement and fewer investments that have to be sold and lesser money that needs to be withdrawn from tax-deferred accounts.
This could result to a lower tax bill and lower tax on Social Security benefit.
At the bottom is a lower retirement expense that started off with paying down the mortgage.
Paying more than the amount due and paying the mortgage earlier has its own advantages and disadvantages.
Let's discuss first the pros: -In any given situation, paying off a debt always give a favorable return.
It's worth considering especially if you have a large amount of money at hand that your are having difficulty deciding whether to invest on stock and bonds or not.
-Paying off a mortgage gives you more equity in the house, which could let you avail of a larger reverse mortgage.
-Paying off private mortgage insurance or PMI, and building up your equity sooner would also mean a paying off that estimated 0.
5% of the mortgage annually, of which expense is not deductible for many homeowners.
-Peace of mind is priceless.
Being mortgage-free is such a relief for most of the people.
As Jean Chatzky put it, that having debt makes one unhappy; unable to sleep; gives a lot of stress, especially when one's income slides down or those at a retiring age.
In some cases, some people may opt for keeping the mortgage as long as possible due to the following reasons: -A higher return on investments than the mortgage rate can be earned.
With the current rates being low, this doesn't sound too hard, despite threats of some risks.
-Keeping the mortgage gives you an option of receiving a significant tax advantage.
But one must take note that true tax benefit is limited to the extent that the itemized deductions exceed the standard deduction.
In 2010, an amount of $5,700 is deducted from tax of single taxpayers and $11,400 for married taxpayers; those people age 65 or older could get $1,400 if single or $1,100 if married, tax deduction each.
Another thing is that mortgage payments progressively are composed largely of principal and less interest.
This reduces the amount that can be deducted each year.
It means that deduction can be valuable, but it is recommended not to overvalue it.
-If the person value keeping his or her investments liquid or can easily be accessible, maybe because of unreliable income and weaker job security, or the calmness that emanates from having big savings.
Because, once the money was given as payment, it could not be taken back easily.
But when can you make the right decision? It is ideal for most people to prioritize paying off credit-cards and other consumer debt, or save for emergencies or max out tax-advantage retirement accounts.
This is surely an ideal set of priority, but put paying off the mortgage early your next priority.
Those people aged 62 and above and some conservative investors, might pay of the mortgage first before contributing to an IRA or 401(k).
For younger people, the computation would be more in favor of keeping the mortgage, especially since younger persons will be investing in longer-term investments that can outperform the rate of your home loan.
When people age, your portfolio must be more conservative.
This could mean that there is no possibility of earning as much as 4.
5% to 7.
0%.
As retirement approaches, we become much concerned of being financially free.
And in concept, having debt would definitely not allow you financial independence.
As a matter of fact, most retirees do owe someone money.
But an improved and better retirement prospects, would also mean paying off the mortgage.