Saturday, May 18th, 2024

Home ownership and mortgage planning

Home ownership and mortgage planning

For most of us, our mortgage is the largest debt we ever have, and we tend to treat it with a degree of fear.  The dynamics of how you should handle your mortgage are different than they were 10 or 20 years ago.  From the late 1970’s until the early 1990’s mortgage rates were 10% to 20%, so an entire generation was trained to pay off their mortgage above all else.

Few have bothered to question whether this is the right approach even though rates spent many year in the 2-4% range and are now more like 4% to 6%.  Did you know that with the exception of the late 70’s to the early 90’s that 4% to 6% was quite normal for a couple of hundred years? 

I think there are three important yet simple numbers to consider when deciding what to do with your next dollar.
Your mortgage rate                                      5%
Long term equity investment return          7-9%
Your marginal tax rate                                 30% and higher
for income above $50K

Ask yourself which number will give you the most benefit in the balance of your life?
a) Pay down a 5% debt, never see your money again
b) Invest and earn an average of 7%-9% compounding for life
c) Get a tax deduction and keep 30%+ more money
d) Combine the 30% with a 7%-9% return.

You may find that it is better to reduce tax and invest than to pay money back to the bank.  In fact, there are a number of ways to look at this question, depending on your individual circumstances. 

To discuss the possibilities just contact our office.