Does it Make Sense to Repay my Mortgage or Should I Use The Money to Invest Elsewhere?

REPAY-MORTGAGEThat depends on the cost of the mortgage, your appetite for risk, and your age.

People often assume it's a mistake to pay off a mortgage, because it represents a tax deduction. But tax deductions don't put money into your pocket; they just reduce your expenses. If you're in a 33 percent combined federal and state income bracket, $100 of mortgage interest costs you only $67 after taxes but that's $67 that you'd save if you paid off the mortgage.

Prepaying the mortgage doesn't reduce your monthly payment, but it may be worthwhile because it shortens the term of the loan, saving you thousands of dollars of interest.

Paying down the mortgage is a risk-free investment, and it can be done with extremely small sums of money. A simple method is to round your monthly payment up to the nearest $100. If you're paying $783.20 a month, for example, write the check for $800. You know exactiy what you'll earn on that additional $16.80 a month: if your mortgage costs 8 percent a year in interest, 8 percent is your rate of return on prepayment.

To decide if prepaying the mortgage is the best use of your money, ask your financial planner how that return stacks up against what you'd earn in other investments. Could you earn more by investing in a comparably safe investment, like a CD or Treasury bill, for example?

-Only consider alternative investments that you'd really make. Sure, over periods of a decade or more, you can expect to earn 10 percent a year in the stock market. But stocks are a riskier investment than prepaying a mortgage and your potential return in stocks is irrelevant in any case, if CDs are the only investment you'd seriously consider.

-The first alternative investment to consider is paying offyour credit card debt. If your credit card balance costs you 18 percent interest a year, don't even think about prepaying an 8 percent mortgage instead.

-Don't prepay the mortgage ifyour house isyour sole asset. A house is an illiquid, undiversified investment. Diversify by investing your available cash elsewhere.

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