Should You Pay Off Your Mortgage?

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Speaker: Just think about the moment you will tear up your mortgage. No more interest payments, and finally, the house is yours, all yours. It just feels like financial freedom, doesn't it? That's why the idea of paying a little extra on your mortgage each month and getting your balance to zero sooner is so appealing. But paying off your home that isn't the slam-dunk that paying off of a high interest credit card is. There are better uses for your money. First, don't even think about prepaying your mortgage unless you have at least three to six months worth of living expenses in safe, liquid investments such as money market funds. Money you put into the house is money you can't get back quickly in an emergency. Second, most of the time, it's smarter to put shares their savings into a 401K or other tax-deferred account. The younger you are in the higher your tax bracket, the truer this is. Why is that? Well, it's because you get no tax break for paying down mortgage principal, but you get a nice tax break by funding a 401K. One study shows that taking advantage of the additional tax savings of a 401K can put you 11 percent to 17 percent ahead at retirement compared to prepaying your mortgage. The one exception to this rule is if you're close to retirement. At that time, you have fewer years to let the tax advantages of the 401K build up. Also you should have a more conservative portfolio, so you may not be earning as much interest on your 401K as you're paying on your mortgage. Plus, there's a psychological benefit to retiring without debt, and lowering your costs while on a fixed income. Nothing wrong with that. Sleeping well is sometimes better than getting the best possible after-tax return.

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==== Transcribed by Automatic Sync Technologies ====