Should You Pay Off Your Mortgage?
By David Henderson
That’s a question asked by Louis J. Prues and answered by the Wall Street Journal‘s Kelly Greene in the weekend Journal. Ms. Greene summarizes the findings of an analysis by Tony Webb, a research economist with the Boston Center for Retirement Research. Mr. Webb points out that the rate of return you can expect to earn on a riskless asset is likely to be lower than your mortgage interest rate. That argues, all other things equal, for paying off your mortgage.
He also considers one other factor, which you can read about.
But he doesn’t consider two factors that could be important, one that argues against paying off your mortgage, and one that argues for.
First, the one against. A fixed-rate mortgage is a great hedge against long-term inflation. In fact, for most people, it’s the main inflation hedge they have.
Second, the one in favor. Think about whether you itemize your deductions using Schedule A. If you do, then your itemized deductions (mortgage interest plus most state and local taxes plus tax-deductible charitable contributions plus a few other items that apply to very few people) exceed your standard deduction. For a married couple filing jointly, the standard deduction for 2009 is $11,400. What if your sum of itemized deductions is just over that, say, $13,000 and your mortgage interest component is say, $6,000. That leaves $7,000 for the other tax-deductible items. Then, although we think of mortgage interest as being deductible, your incremental deduction due to the mortgage is really only $1,600 ($13,000 minus $11,400). So you’re “wasting” the other $3,400 of the mortgage interest. And you’re doing it to invest in assets that are taxable from dollar zero. I could go on, but I’m guessing that you get the point.