Pre-paying the Mortgage -- Should I or Shouldn't I?

Clients often ask whether we recommend accelerating their mortgage payments in order to retire the debt faster. It's a question that might have two answers -- one based on the economics and another based on your peace of mind and risk aversion.

The numbers side of the equation is fairly simple. It's a matter of comparing the rate of interest you are paying to the investment return you expect to earn going forward. Just remember, as you make this comparison, that the interest portion of your mortgage payment is tax-deductible, and reduces the cost of your mortgage. So, for example, if the interest rate on your mortgage is 6% and you are in a 40% combined (federal plus state) tax bracket, your after-tax cost for the loan is 6% x (1- 40%) = 3.6%. If you have the opportunity to earn more than 3.6% after taxes on relatively safe investments the numbers say you should not pre-pay. (Excuse the rhyme).

But beyond the numbers it's important to consider what is going to allow you to sleep peacefully at night. By doubling the equity portion of your monthly payment can pay off a 30-year, 6 % mortgage in less than 21 years. Reducing your fixed monthly expenses might allow you to retire sooner or at least cut back and take life a little easier. It's hard to attach a numeric value to that benefit, but the value is very real to many people.

Balance is one of the mantras we return to again and again in our practice. We seek balance in our own lives and try to provide it for our team members. And we encourage our clients to look for balance in their financial lives as well. Finding the right balance on this mortgage question is a personal decision, and not a purely financial one.

Annette Simon

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