A thought provoking article by Ernie McDaniel
There are potential advantages (and disadvantages) to both strategies. Which is the better choice may depend on your personal circumstances.
Advantages to paying off a mortgage and owning your home free and clear include:
* If you get into cash flow trouble, there is no threat of loss of your home as a result of your not being able to continue payments on the mortgage.
* With no mortgage, there are no mortgage payments, which can be helpful to someone on a limited income; for example, a retired person.
Advantages of carrying a big ole mortgage:
* During times of high inflation, your mortgaged home might grow considerably in value as measured by dollars, with little of your own money actually invested in the house. However, this leverage can work the other way. The “other way” happened to some homeowners in the ArkLaTex in the late 1980's. Their sad fates were to sell their homes for less than they owed and to suffer the considerable financial pain of coming up with the difference.
* In the state of Louisiana, all that is protected of one’s home equity if one is on the losing end of a jumbo law suit and facing consequent bankruptcy is $25,000. For this reason, homeowners may choose to keep their home equity below this amount in order to minimize their exposure to loss beyond their liability insurance limits.
* For homeowners in high tax brackets, the income tax deduction of mortgage interest paid on a home may be particularly valuable. For example, the cost of 5% interest for a combined 40% state and federal income tax marginal bracket, results in a net after-tax cost of 3% interest. If one can reasonably expect to earn more after tax growth in investments than this cost, then there may be some logic in doing so. For example -- and this is purely illustrative, not based on any particular investment and not a prediction of future growth, which of course is not guaranteed -- if you can borrow money for net cost of 3% and are able to invest it to earn 6% net after taxes, then you may gain 3% net after taxes each year. Compound that over three decades and it has the potential of growing into some really serious dough.
You may want to consult with your attorney or accountant (and I am neither) as well as your financial professional before choosing whether to fast-track paying off your home or instead to keep the mortgage balance maximized. The decision may truly have enormous long-term consequences.
Ernie McDaniel is a Chartered Financial Consultant and President of McDaniel Financial. He can be reached at 318-798-9022.
