Coldwell Banker Success

Let's say you are in a position where you have extra money to repay your mortgage. Is it worth doing? The quick answer is that it depends. To get the right answer, you must look at the other alternatives which you have with your capital.

For starters, there may be other opportunities available to you. I'm really not making reference to the equities market or any other marketable securities. These have a tendency to offer mediocre yields over exceedingly long periods. The historical return for equities has averaged around 6% over the last one hundred years. Therefore, if I had an option between paying off my property versus buying stocks, I'd rather pay off the home loan. In addition, the exchange is extremely volatile and returns can be significantly less than their long term averages over ten to fifteen year periods. We are in such a cycle now. If the interest rate on my mortgage is 6%, then I will not likely gain anything by deploying the additional money into stocks.

What if you had more opportunities than this? What if you were considering to start or expand your own business? Clearly, there is more risk to that. Nevertheless, the return on your capital investment will probably be way higher than investing in securities. In this circumstance, the rate of return would be much greater than the amount of interest that you're required to pay on the mortgage. In this situation, you're better off investing the money instead of paying off your loan.

The opportunity cost demonstrates that my returns are negative if I pay off my loan when I have better ways to invest the money. If you plan on opening a brand new company, home equity is much less expensive than the majority of the choices. Small Business Association loans, in particular, are comprised of higher costs as well as higher interest rates. This is because it's hard for banks to value the collateral and defaults are more common. When they take possession of the collateral after a default, it's much tougher to get rid of at fair valuation than a residence.

Finally, depending on your income tax bracket, the real price of borrowing could be lower than your rate of interest. Since mortgage interest is tax deductible for many taxpayers, the income tax savings may be considered in offseting the money you are paying in interest charges. Your tax savings depends on which tax bracket you are in. Hence, if you're considering paying down your home loan, definitely consider all your other alternatives first.