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How to Manage Your Debt, Part 5 |
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If you're in a hurry to pay off your traditional mortgage, keep this strategy in its proper perspective.
If your mortgage is a traditional 30- or 15-year fixed-rate loan, understand that the biggest benefit of paying it off is peace of mind, not financial savings. True, many people derive immense personal satisfaction and contentment from having their houses paid off. This seems to be a holdover from Great Depression era thinking when the motto may have been "don't lose your house to the bank." But many of us have better uses for our cash, especially if we're investing or paying down debt.
Use your after-tax rate to figure out the cost of your mortgage.
If you can deduct your mortgage interest from your taxes, figure out what percentage of interest the deduction saves you. For example, a taxpayer in the 25 percent bracket who benefits by itemizing deductions will pay only 5.25 percent after tax on his 7 percent mortgage. (7% - 25% x 7% = 7% - 1.75% = 5.25%). Likewise, every $1,000 of interest would actually cost only $750, since the IRS doesn't tax the amount of the deductible interest. ($1,000 - 25% x $1,000 = $1,000 - $250 = $750).
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