Mailbag Monday: Prioritizing your Principal
On 4/15, you made a comment about using tax refund toward principle on mortgage. I have to assume you are suggesting pay off your house, save the interest and not be having to make the monthly payments. That sounds like a good plan. I had the idea to get rid of my second mortgage, a very long life second. I’ll never see the end of it, if I make payments. But I could pay it off. I had 3 financial advisers say that was a bad idea because even in retirement, I will need write-offs, and current interest rates are cheaper than what they will be. Why the disconnect here? Also, I heard on the radio that mortgage interest deduction will go away as part of Obama care. What do you know of this?
–Ron
Hi Ron,
Those financial advisors are giving you advice based on the idea that the you’ll take the money you’re not putting into paying off that second mortgage and invest it. And that the return you earn on that money will – on an after tax basis – beat the return on your second mortgage (which is equal to the interest rate you’re paying, minus your tax deduction).
Those are two big assumptions. The first – like the argument to buy term and invest the difference – assumes you actually will make that investment. The second is actually easier to maneuver. Current interest rates are cheap. And, yes, they’re tax deductible. (I’ve heard talk about the mortgage interest deduction, too, but nothing that makes me think it’s actually happening, at least in the short-term). Both of those things make them easier to beat. And because rates are headed up, if you need to take out another mortgage in the future you’ll almost surely pay more.
Still, I’m in favor of paying down debt – particularly high interest rate debt – and of eliminating mortgage debt before you retire and your income tails off. Wouldn’t it be nice not to have that sitting on your shoulders as you adjust to a paycheck that’s less flush?
Jean
