As you know, the stock market has been exceptionally volatile in
recent years. As a result, many people are beginning to shift their
funds into more stable investments. One such investment, often
overlooked because it’s so near at hand, is prepaying your home
mortgage.
Paying off your mortgage early offers several advantages. For
one thing, it reduces your total interest payments. Say, for
example, you have a 30-year fixed rate mortgage at 7 percent and
your mortgage balance is $150,000. By paying an extra $50 each
month toward the principal, you can reduce your total interest cost
by more than $34,000. Not only that, your mortgage balance will be
paid off four years early.
As you know, the stock market has been exceptionally volatile in recent years. As a result, many people are beginning to shift their funds into more stable investments. One such investment, often overlooked because it’s so near at hand, is prepaying your home mortgage.
Paying off your mortgage early offers several advantages. For one thing, it reduces your total interest payments. Say, for example, you have a 30-year fixed rate mortgage at 7 percent and your mortgage balance is $150,000. By paying an extra $50 each month toward the principal, you can reduce your total interest cost by more than $34,000. Not only that, your mortgage balance will be paid off four years early.
Prepaying your mortgage also provides a guaranteed rate of return. In the above example, if you’re in the 27 percent tax bracket and itemize mortgage interest on your tax return, making prepayments will generate a 5.1 percent return. Nowadays, that’s better than many bond and certificate of deposit rates. Another advantage: Prepaying your mortgage may shorten the time you’ll have to carry private mortgage insurance.
If you’re carrying balances on high-interest credit cards or consumer loans, you’ll want to pay those off before putting extra money into your mortgage. Paying down high-interest debt also provides a guaranteed return.
Paying down your mortgage may not always be the best investment choice. Many economists expect the stock market to recover from its doldrums eventually. By purchasing stocks or stock funds now (perhaps through your 401(k) plan), you may have the opportunity to buy low and sell high. If stocks earn an average 8 percent return during the next 15 years, you may wish that you’d plowed cash into stocks instead of your mortgage.
Mary Hubbell is a partner with the accounting and business consulting firm of Bianchi, Lorincz & Company located in downtown Hollister.
