Should You Pre-pay Your Mortgage

There are two sides to this question just as there are to most questions. So, in order to get the right advice for your situation, a few other considerations have to be made first.

There is one school of thought that interest and property taxes on a person's home is one of the few income tax deductions still available and a taxpayer needs as many deductions as possible.

A deduction does not reduce taxes dollar for dollar but simply by the marginal rate of the taxpayer. For instance, if you had a $10,000 deduction and were in the 28% tax bracket, it would save you $2,800 in taxes. The net effect is that you still spent $7,200. The question is: did you get $7,200 worth of economic benefit?

As an example, let's say you have a mortgage at 9% interest. You have an extra $100 per month available and want to put it where it will do the most good.

If you put it in a savings account, it may only earn 5%. If you make an additional $100 principal payment on your 9% mortgage, you will have a 4% net gain without any tax considerations. Regardless of what tax bracket you are in, you will save money in this example.

The answer to the original question is determined by asking if you can earn more in an alternative investment than the rate being charged on your mortgage. If not, then in most cases, you will be better off pre-paying your mortgage.

There is one other consideration that should be made. If you will need the money in the near future, the equity in the home may not allow the liquidity needed. Some states make it very easy to have a home equity loan but economic conditions can always change which may make it difficult to get at the equity.

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