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Pay Off the Mortgage or Invest for Higher Return?


A reader who is in a position to pay off his mortgage wants to know whether the tax benefit of having a mortgage outweighs the potential peace of mind of ditching his mortgage.

Q: I’m in a position to pay off my mortgage, but am curious whether the tax benefit of having a mortgage outweighs the potential peace of mind of owning my home outright.A: This question comes up time and again, and our answer generally is always the same: Pay off the mortgage. Not having to worry about keeping a roof over your head in the event of an unexpected medical or financial crisis is reason enough. (This is especially true if you’re nearing or in retirement.)

Another reason to ditch the mortgage is that the tax benefit diminishes over time, as more and more of your monthly payment is allocated to principal rather than interest. The mortgage interest tax deduction also begins to phase-out based on the level of your adjusted gross income, meaning many high-income households don’t get the full benefit of the tax break. The declining value of the deduction makes the return on paying off your mortgage even more attractive.

Finally, with law makers talking about “putting everything on the table” to address federal budget and deficit woes, there’s a chance (though admittedly slim) that the mortgage interest deduction won’t be around in the coming years.

Still, some would argue that the cash would be better working in tax-advantaged investments, rather than tied up in an illiquid asset such as a home. The only time it ever makes sense to pay off your mortgage is you expect to earn more on your investment, after taxes and investment expenses, than you would on your current mortgage interest rate. This calculator can help crunch the numbers for you.

ASK THE EXPERT: Do you have a personal-finance or financial-planning question? Send your questions to tcullen@hcplive.com.

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