| Recently, many people have been asking "if I can | | | | But for many people this approach simply will not work. |
| afford to do it, should I pay off my mortgage?" | | | | Why? Because they will take the money and spend it |
| Generally, I have heard people say that making | | | | rather than invest it. The temptation is just too great. |
| additional principal payments on a mortgage is not the | | | | In addition, when you make additional principal |
| "smart" thing to do. The rationale is usually that stocks | | | | payments on your mortgage you lose some flexibility. |
| historically return about 10% over time, which would | | | | Assuming you don't refinance or pull the money out |
| generally exceed the interest rate on your mortgage. | | | | with a line of credit, you don't get those extra principle |
| From an investment standpoint this is a very easy | | | | payments back for awhile. |
| question to answer. Because of the low interest | | | | People often say for example "if I pay an extra $200 |
| environment we have been in over the last several | | | | a month it will save me $100,000 over the life of the |
| years, most people have mortgages in the 6% range. | | | | mortgage." While this may be true, people fail to realize |
| So bottom line - can you make more than 6% on your | | | | that $100,000 savings over a 30 year period does not |
| investments? | | | | have the same present value as $100,000 today. This |
| Generally, the answer to this question is that it is a bad | | | | is similar to someone who bought a house for $45,000 |
| idea from an investment standpoint. You'll make a lot | | | | in 1968 that is now worth $300,000 and they can't |
| more than 6% investing in real estate. Even the stock | | | | believe how much it has gone up. The appearance is |
| market will earn you 10% over the long term. But it is | | | | that the home appreciated substantially. But in this |
| actually more complex than that. The reality is - will | | | | example, it is a compounded rate of only 5%. This |
| you be able to stomach the volatility you could | | | | applies to the question "should I pay off my mortgage." |
| encounter in other markets? | | | | The perception is that the savings is substantially |
| Let's face it, investment decisions are not always | | | | greater than it is. |
| about the "best" financial decision. Your personality and | | | | So, in theory, you should take any money that you |
| personal preferences always play a part. If making a | | | | would use to pay off your mortgage and invest it in |
| financial decision allows you to sleep better at night, | | | | more real estate, stocks, or a mutual fund. Sounds |
| then that may be the best decision for you. You just | | | | pretty easy. But the reality is that most people are not |
| need to realize that from an investment standpoint it | | | | very disciplined. So for many people, making an extra |
| may not be the best decision. | | | | couple hundred dollars a month payment may be a |
| When I refinanced my mortgage a year and a half | | | | good idea. I'd rather see you pay off your mortgage |
| ago, I took out a 30 year fixed at 5.25%. At the time a | | | | rather than spend the money on frivolous consumer |
| 5 year CD was paying 4.75% to 5.00%. So for me the | | | | items. You just need to acknowledge that it is not the |
| decision was a no-brainer. I needed to pull out as much | | | | best investment decision. But sometimes that's OK. |
| as possible, because even if I did not invest it in real | | | | We all have our limitations. |
| estate (not sure this is even possible for me!), I could | | | | So if you find yourself asking the question "should I pay |
| put it in a CD and almost break-even. In fact, I believe | | | | off my mortgage", you now have a basis for making |
| that I am virtually assured that CD rates will average a | | | | an intelligent decision. If you are too tempted to spend |
| lot higher than 5.25% over the next 30 years. So for | | | | that additional money or you want to sleep better at |
| me the answer to "should I pay off my mortgage" is | | | | night, then by all means pay off the mortgage. Don't |
| an easy one - no. | | | | fear - it won't be the end of the world. |