Recently, the New York Times ran an article discussing the relative merits of paying down a mortgage. According to the article, one should think long and hard before adding even $25 a month to extra principal.
How have we arrived at such a state? How could paying down or paying off the mortgage ever be considered anything but good? Well, there are many reasons and all of them add up to one thing: our financial system rewards mortgage debt.
That sound crazy, doesn’t it? But, that’s the truth of the matter. Though the article does give admit that having no mortgage does have psychological benefits, a sense of security, a feeling of real ownership, the author feels the actual cash benefit seems paltry compared to the the potential financial pitfalls.
Financial analysts consider twofold main pitfalls in socking extra cash into the mortgage, one is lost profit on the stock market and the other is lost tax deduction. As for stock market “profits,” in my view, how can financial analysts still be flogging stocks and bonds after the recent Wall Street debacle when the federal government was called upon to prop up our largest corporations and financial institutions which were in danger of “melting down”? This is not 1929 we’re talking about, but 2007 to 2009 when trillions were wiped out of 401 ks and IRAs. We are still dealing with the aftermath of pension fund investments gone south and even giant funds like California’s PERS have been accused of excessive expensing at the same time that its holdings plummeted. In the meantime, the NY stock market has been on a wild ride ratcheting up and down with gay abandon in the intervening years.
Is the average person really supposed to consider the “opportunity cost” of lost stock market profit over the real and tangible comfort of paying off the mortgage on his or her own home ?
The next “pitfall” is losing the tax deduction. Let’s take the example of a 30-year fixed rate $400,000 mortgage at 4.25%. Pay an extra $200 per month and you pay it off in 25 years and save almost $60,000 in interest. If you are in the 28% tax bracket, losing the deduction means you really save $42,000 or 3.06%. Is that such a bad thing? At least paying off your mortgage is a sure thing whereas “betting” on the stock market hammers even the so-called experts.
Financial analysts worry that putting all that money into a home mortgage is really putting all your eggs in one basket.They all seem to think the stock market is better and trot out the old stats about how over time the market is really making money. Maybe so, but the average homeowner is really in no position to figure out how to fit himself or herself into those stats which have badly skinned many an amateur, not to mention the professionals.
The bottom line in my view is that of course it is better to pay down your mortgage. If you are heavily indebted to credit cards or any other high-interest payment, pay those down first. But, if you can manage a few extra bucks or even one extra payment a year–Just Do It!!