Mortgage Repayment & Investment Options
1. Refinance at a Lower Interest Rate
- Ensure interest savings exceed closing costs, including lender fees and points.
- Reducing the rate can lower monthly payments and save on total interest paid.
2. Switch Mortgage Term from 30 to 15 Years
- Example:
- $100,000 mortgage at 8%
- Monthly payment: $956 (15-year) vs. $734 (30-year)
- Total interest paid:
- $72,080 (15-year)
- $164,240 (30-year) → $92,160 savings
3. Make Extra Principal Payments
- Reduce loan balance faster and save on interest.
- Payments can be regular or irregular depending on financial flexibility.
Considerations Before Prepaying a Mortgage
- Maximize retirement contributions first (401(k), Roth IRA, Traditional IRA).
- Pay off high-interest debts (e.g., credit cards) before mortgage prepayment.
- Ensure sufficient emergency savings before committing excess funds.
- Opportunity Cost: Stock market historical returns (~10%) may outperform mortgage savings.
- Conservative Investors: Bonds, CDs, and money markets may justify extra mortgage payments.
Tax Analysis: Where to Invest Extra Funds
- Compare After-Tax Return vs. Mortgage Cost
- Mortgage interest rate = 6.0%
- Less tax deduction: (6% × 34%) = 2.04%
- Net after-tax cost = 3.96%
For every $1 in mortgage interest, a taxpayer gets 34 cents in tax savings, effectively paying 66 cents.
For a taxable investment earning $1, the taxpayer keeps 66 cents.
If after-tax return on investment is below 3.96%, it’s smarter to pay down the mortgage instead of investing.
If return exceeds 3.96%, investing might be more beneficial—but risk should always be considered.