Should I Pay Off My Mortgage Early?
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By Benjamin Hayes
One of the more frequent questions we hear as financial advisors is, “Should I pay off my mortgage early or keep making the minimum payment?” In most cases, paying down debt is an easy decision. When talking about credit cards and auto loans, which generally have high interest rates and little tax benefit, depending on the circumstances the best choice may be to pay these off immediately. But when it comes to deciding whether or not to pay off a mortgage (or any other financial decision for that matter), in the end you need to feel comfortable with the strategy you choose.
Paying the Minimum
There are a number of reasons it may make sense financially to hold a mortgage and resist the urge to pay off the debt. First off, the payment of mortgage interest can provide a tax deduction, in some cases 25% to 40% of the amount of the mortgage interest. That means already historically-low, 30-year mortgage interests of 4 to 4.5% can decrease to an effective rate of about 3%.
Second, those excess funds that would have otherwise been paid towards the mortgage can be used to build up an emergency fund. Better yet, if a solid emergency fund is already established, the excess funds can be invested into a well-diversified portfolio. The argument is that those funds may achieve higher long-term returns than a mortgage rate. It is a particularly attractive option if those excess payments were to be directed to a 401(k) plan, where there may be the potential benefit of tax-deferred growth and an employer match on contributions.
To cap it off, mortgage debt is based on its current dollar value. As income and the cost of goods rise in the future, the relative cost of debt may fall. The Federal Reserve over the past three years has implemented some unconventional monetary policy, injecting money into the economy and raising the potential for future inflation. Holding a low interest rate, 30-year fixed mortgage can provide a hedge against potential future inflation. If that inflation does in fact materialize, monthly mortgage payments could become considerably easier to afford.
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Paying Off the Mortgage
The arguments for simply paying off debt are also well-reasoned. First and foremost, tomorrow is not guaranteed. Paying off debt today while funds are available can help avoid the obligation of making future payments when funds may not be as plentiful. In addition, the strategy noted above (of paying the minimum and investing the rest) involves unknown future market returns. Paying off a mortgage improves the odds of a return equal to the mortgage rate.
Second, many would argue that the purported tax benefits of deducting mortgage interest are overblown. Take a look at mortgage amortization schedules and what you may find is that the interest is likely front-loaded into the beginning years of a 30-year payment schedule. By the time most individuals are in a position to pay off their mortgage, the available interest to deduct is miniscule. And that interest may only be deductible if there are other sufficient itemized deductions to raise the amount above that of the standard deduction.
Another significant factor to consider is the area in which the mortgaged property lies, or more directly the size of the mortgage. For individuals residing in the Midwest with lower median home prices, the value of a tax deduction may not be nearly as large as it is for residents of San Francisco, where median home prices are generally much higher.
Should insurance be a part of my financial plan? Part 2
By Janice Deringer
© David Castillo Dominici
So clearly, Step 1 is to have a very good financial plan. This will help you see where your finances stand with your current view of your income, spending, liabilities, assets and investments. In creating a plan, you should be able to see not just your net worth and future projected net worth, but a matching of your cash flow with your expenses and a view of the estate taxes that you may eventually owe. Then you can see where you might be vulnerable and whether insurance might help you mitigate some risk.
Life Insurance
I’m sure that many of us are familiar with life insurance and see it as a way to provide some financial assets to either a spouse or our heirs that will help them manage a transition. And, indeed, this is one of the ways that you can use life insurance. You may have a non-working spouse and you believe the life insurance could help them maintain their current lifestyle. Or, you may want to insure a stay-at-home spouse so that you could hire assistance for domestic/household duties should your stay-at-home spouse pass away.
You may have identified a need in your financial plan that you want to be sure to plan for. This could include college education for children or grandchildren or providing care for an heir with special needs. In both of these cases, you may be able to use life insurance assets as a way of providing support for those people beyond the lifetime of the person providing it.
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Should insurance be a part of my financial plan? Part 1
Insurance plays an important role in your financial security, but you need to identify how it fits into your larger financial plan. What risks can you afford to take? How will changes in your health, assets, and income affect your plan? Today we present part 1, and will examine the general considerations and questions for including this protection into your financial plan. Part 2 will address specific insurance types, and their risks & advantages.
© David Castillo Dominici
By Janice Deringer
Mention estate planning and insurance in one sentence and people tune out! Nonetheless…it is an important topic to consider and one where you should have a real framework in place before making decisions. So we will forge ahead. I hope you join in.
A Good Financial Plan
When you step back and think about insurance, you need to realize that before plunging ahead and securing insurance, you need to identify what role that insurance is playing in your larger financial plan. Questions to ask to identify needs.
The Digitization of Service: Finance and the Future
By: Nima Tolooi
At the 2012 TEDxReset Conference in Istanbul, futurist speaker Thomas Frey predicted that over 2 billion jobs would disappear by 2030, lead by big losers in the power, transportation, and education industries.1 Most of the jobs cut will be casualties of economies of scale and efficiency. This isn’t a new threat. Automation has evolved its bulls-eye; having decimated the labor markets of the agricultural and later industrial models, it has now aimed treacherously toward a human capital-heavy, professional service sector.
12 Steps to Financial Fitness
Are you financially fit and prepared for the future?
Planning and discipline are integral to reaching retirement in a financially fit state. To help you get started, we’re re-posting our 12 Steps to Financial Fitness. This information is too valuable not to share again. Look out for an important article we’re posting tomorrow, “The Digitization of Service; Finance and the Future.”
Step 1: Write Down Your Goals
Putting your goals and dreams in writing makes them real. Create a list of the big things you want in life—travel, your own business, a vacation home, early retirement—and use the list as a starting point for the small steps you must take to reach them. READ MORE
