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Here are a few reasons for Paying Off Your Mortgage Early:
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You want to relax and not sweat each month over a payment.
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Being debt free was drilled in your head and you want the freedom of not
having to pay a mortgage.
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Early retirement. With no mortgage payment, you can save up for
retirement faster and quit sooner.
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You have a low tolerance for risk, are not secure in your job or are not a
disciplined spender.
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You want a guaranteed rate of return. Paying off your mortgage guarantees
you that savings rate. There is no guarantee when one invests in the stock
market.
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You don't itemize but take the standard deduction.
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You live in Canada or another country where these is NO tax
benefit to carrying a mortgage.
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You are disciplined enough that once you have paid off your
mortgage, you will invest the same payments into a retirement fund
until you have enough to meet your retirement needs. (Remember, with
no mortgage, your required retirement income will be greatly
reduced. Spending your savings on an expensive toy - car, boat etc
that LOSES money as soon as you buy is not wise - unless the money
was not your retirement money.
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Reasons for NOT Paying Off Your Mortgage Early:
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You may be able to use leverage to help you reach your goals more quickly.
How? By using someone else's money (the bank or investor). You may be able
to buy more or buy bigger.
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While the tax deduction for interest on your primary or investment
property loan is NOT dollar for dollar, your effective interest rate is
roughly 60-85% of the note rate.
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If you can expect to make more on your investments after tax than the
effective interest rate on your mortgage, then it doesn't make sense to
prepay your mortgage. (Generally)
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You think you can get a better return in another investment (mutual
fund - or REIT,
stock market, real estate, investment property, or as a lender). (This is
leverage)
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Your have a high tolerance for risk. The more conservative you are
in investing, the less likely it is that the after-tax return on your
investments will outpace the effective interest rate on your mortgage loan.
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Your in your 30-40s and can tolerate risk and fluctuations in an
investment portfolio. Folks in their 60s should consider to prepay their
mortgage if possible.
As my dad always says to me - "How do you sleep at night?" He says
that because for he past 20 years my wife and I have borrowed our way to owning
7 investment properties around town. When we first started out with our first
house - a 3 family which we lived in, I always paid the extra principal EVERY
month. Then refinanced. Refinanced again - to lower rates. So now, 22 years
later, I am attempting to refinance these properties that HAVE NO mortgages and
reinvest the money. Carefully.
Am I making the right decision? I think I read every opinion, spoke to
attorneys, accountants and real estate gurus. They all have their opinions and I
have mine.
I am not gambling in the casinos, the stock market or buying a useless boat
or car. Instead, I am preparing for finding a value property or conservative to
medium risk mutual fund or a combination.
NOTE: Speak to your accountant financial advisor as to the tax benefits/consequences
of mortgage prepayment and investing.
There are 2 parts to the simple formula:
1) RISK = REWARD.
2)Remember, RISK does not always = REWARD.
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