As a financial planner I am often approached by the same question lately, “now that the stock market is uncertain and real estate values are not inflated like they were, does it make sense to start chipping away at our mortgage and pay it down?”
My first answer is often,”well, that depends.”
Many factors need to be considered but simply, assuming you have contributed fully to eligible retirement plans, stock programs, Roth IRA’s, etc and education or other savings goals have been met, credit card is paid then you may want to consider paying your mortgage down. If you feel comfortable and it is important then consider it.
If you are paying a 30 year mortgage at 6% Interest rate, your tax equivalent borrowing rate is 4.8% (20% tax rate assumption), 4.2% (30% tax rate). Interest Rate X (1-Your Tax Rate) eg. 5% X (1-.30) = 3.5% Effective Borrowing Costs
The question is can you outperform the cost to borrow? Can you take the money you would overpay toward the mortgage, assume an extra $500 a month and invest this some where else and make more than 4.5% rate of return. The opportunity cost of your time also needs to be factored, but for many Americans, we are asking once again do I feel safer with no mortgage?
Ryan Richmond is a fee based financial planner and private equity investor from metro Detroit. He has a background in personal, small to mid sized business, family trust and estate planning. In addition, Mr. Richmond has been involved with all aspects of residential and commercial real estate spanning two generations.
