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Chapter 8. Planning for the Home > Mortgage Prepayment

Mortgage Prepayment

Many seniors believe that paying off a mortgage early is always a good idea. If your mortgage interest rate is, as many are, around 7%, you might see making extra mortgage payments as the equivalent of getting an investment return of 7%. But you would be wrong. If you are in the 27% tax bracket and you are deducting your mortgage interest on your income tax return, the true effective rate of interest you are paying is closer to 5%, which means that if you can get a return of better than 5% on an alternative investment, you would be better off.

But, perhaps more importantly, there are things you might do with that money that would be more to your benefit than paying down your mortgage. If you are under the magic age of 70½, putting that money into a tax-advantaged retirement plan such as an IRA is probably a better use of your money in the long run. And if you are intent on paying off a debt, you might take a look at what you are carrying as a balance on your high-interest credit cards. Not only is the interest rate on credit cards much higher than the interest rate of your mortgage, but in addition, the interest you pay on your credit cards, unlike your mortgage interest, is not tax deductible.


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