What has always been a staple of financial planning is now supercharged in today's economy of low rates and incredibly low mortgages prices. Paying off the mortgage is one item investors should place on the back burner.
Managing Your Finances
Couple historically low rates with tax advantages for middle-class investors, including the ability itemize and write off interest expenses on mortgage payments, investors are better off investing the excess rather than paying down debt. Young Americans are in an even better position; as the majority of a mortgage payment is interest and can be written off, they have to time accept more risk, allow their wealth to grow in the market place, and let their real estate holdings appreciate from their timely bottomed out prices.
Calculating the Bottom Line
Luckily for investors, interest on a mortgage is entirely deductible and generates a beautiful tax savings. An investor in the 28% income bracket and a home loan at 5% would effectively pay just 3.6% in interest with the additional savings coming from an itemized deduction.
Home owners looking to refinance have an additional reason to do so. Points, which are the charges mortgage brokers add to a mortgage, are also deductible over the life of the loan. Therefore, a 15-year refinance that costs $1500 would allow a borrower to write off $100 a year for 15 years, which generates $28 of tax savings plus a lower interest rate on the amount borrowed.
Anyone with even the most rudimentary of investing knowledge should be poised to beat, and exceed, an annual return of 3.6%. Those who lock into low rates today may even be able to beat the 3.6% interest rate with corporate bonds, as historically inexpensive rates give way to more a more reasonable level. Considering that stock funds have generated greater than 10% per year and bond funds roughly 5% per year, there isn't a single borrower (with a good interest rate) that should be paying down debt early.
Of course, if you haven't already, lock in today's rates. If history is any indication, they won't be around for much longer.