Is paying off your mortgage early a smart decision for you?
Provided by RBC Wealth Management
and Dave Dupont
Over the past several years, we have seen interest rates dip to historic lows. As a result, a housing boom was formed, creating an opportunity for many people to refinance existing home mortgages. This allowed individuals to get a lower interest rate on their mortgage in hopes of paying down more principal on their home.
When looking at the benefits of having a mortgage, remember that interest on your loan is tax deductible. Therefore, early in the life of a mortgage, much of your monthly payment is an interest expense, which is tax deductible and can allow for considerable savings — especially if you’re in a high tax bracket. But if lessening your interest payment or building equity in your home is a priority, you may want to consider a more aggressive pay-down schedule.
However, if you anticipate selling your home within the next few years, you may want to look to other investments rather than aggressively paying down your mortgage. Focusing solely on your mortgage puts focus on a single investment that may gain little interest savings in the short term.
On the opposite side of the coin, you might find it’s better to put any additional cash to work in the market. One option may be an Individual Retirement Account (IRA). A traditional IRA is a tax-advantaged retirement vehicle where contributions grow tax-deferred. Depending on your income and ability to participate in an employer sponsored retirement plan, you may also be able to make tax-deductible contributions. However, in an IRA, you will have limited access to your investment as it is intended to be a retirement vehicle.
Another option is to invest in a Roth IRA, which allows for contributions on an after-tax basis and provides tax-free earnings. Individual contributions to the plan can be withdrawn at any time and are not taxed. However, individuals will pay taxes on earnings distributions made during the first five years of the plan or before the individual reaches the age of 59 and one-half.
Additionally, if your company offers a 401(k), you may want to consider increasing your contribution limit. Some employers offer a dollar-for-dollar match, which means you’re getting an instant 100 percent return on the dollars you invest. Earnings also accumulate tax-free while your money is in the plan, and it is likely your return will comfortably exceed any returns from mortgage prepayment.
This article is provided by Dave Dupont, a Financial Advisor at RBC Wealth Management. RBC Wealth Management does not endorse this organization or publication.
RBC Wealth Management, a division of RBC Capital Markets LLC, Member NYSE/FINRA/SIPC