Tuesday, September 21, 2010

Why Have a Mortgage?

Most people have a mortgage because that is the only way they can afford to own a home. Although the real estate market is having a very tough time right now, over the long run your house is often your biggest asset and will help fund your retirement. Plus you get a tax benefit from paying the interest on the mortgage.

Some people are fortunate to have significant financial assets. One of the more important questions for these lucky people is “Why do you have a mortgage?” The answer often is “Its my only tax deduction.”

That’s nice but is it worth it? If you have a $200,000 mortgage at 4% you are paying the bank interest of $8,000. The IRS will give you back about $2,000 in reduced taxes so $6,000 is coming out of your pocket. That is not a very good result for your pocket.

Investment advisors argue that you can invest the money and earn more than 4% but they are hesitant to guarantee that you will earn more than the interest rate on your mortgage. My suggestion is to pay off your mortgage and then invest the monthly payment with your investment advisor. You will be amazed how quickly that money will pile up.

You can’t pay it off? Add a little extra to the principle you pay every month so that you will pay your mortgage off in a shorter time period. This will save you a lot of money.

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