The Arguments Against Prepayments

The two most common arguments that I get against paying off your home as quickly as you can are:

#1 – The interest you pay on your mortgage payments are tax deductible!!!

#2 – You are better off investing the prepayment money into other higher earning investments.

I received one such e-mail today from a MyQuo.com reader.  Let’s look at the first argument.

Yes, the interest payments on your home are likely to be tax deductible.  Often people use this rationale to justify their 30 year mortgage or their house they are living in beyond their means.  However, many people over estimate how much these interest payments are actually worth.

Let’s look at someone who is in the 25% federal tax bracket and 8% state tax bracket.  And let’s assume they are purchasing a $125k house with no money down at 6.5% interest on a 15 year loan.

The tax savings will be $1,467 a year over the life of your mortgage.  That adds up to $22k in tax savings after 15 years.  On the other hand, if you made double payments on the same home you would save $48k in interest payments.  This represents a $26k savings in favor of paying your house off with double payments.

Now let’s look at the second argument.

Yes, you “can” earn more money on other investments on your money instead of making prepayments on your home.  But, you “can” also earn less money or even lose money.  There are few guaranteed returns on your money, and making prepayments on your home is one of them.

It all comes down to the amount of risk you are willing and more importantly, can afford to take.  Personally, I am treating my first house as a safety net.  My family will always have a roof over their heads once I pay off my home.

Once I have that safety net set up, I will more aggressively invest in other areas.  I have a few product ideas that I’m working on, as well as real estate and stock ideas.  The piece of mind knowing that I have a paid off home will help me greatly when pursuing these ideas.

Of course every person’s situation is different.  People who make more money will get more tax break benefit from interest deductions.  Which of course means that people who make less money will receive less tax break benefit from interest deductions.  For the majority of Americans however, prepayments will often save them more money than the tax breaks.

Written by admin on August 7th, 2006 with no comments.
Read more articles on Thinking About Money.