Thursday, December 27, 2007

The Benefits of Paying off a Mortgage are Priceless!

Mortgage prepayment can be a hot topic, for some. The debate can get emotional fast with lots of facts and figures being thrown around. But, sometimes the most important factors can not be measured. We all know that these factors are important, but they just can not be quantified easily. As a result, we analyze only those things that are readily available for analysis. And then we overweigh our decisions based on that available data. These are common mistakes that lead to human misjudgments.

Don’t overlook the unquantifiable, but key, critical factors. For instance, below are a few benefits to paying off a home mortgage, some can be measured while others are priceless!

  1. Asset Allocation. Most Financial planners will advise you to diversify your portfolio. Many recommend allocating 10% to a Real Estate Investment Trust (REIT). Why not invest in your own real estate – your home. The gains are sheltered from taxes and the home does not distribute any taxable dividends.
  2. Guaranteed rate of return in the neighborhood of 6% (varies with mortgage interest rate)
  3. Security is priceless. Miss a couple of mortgage payments and see how long before you are kicked out of “your” home.
  4. No Fear of the future. When times get tough during economic downturns or when you are facing uncertainty with your job, you can rest assured knowing that you are financially stable and you can face the future with courage.
  5. Enables you to operate from a position of power. This factor can impact your entire life and how you make decisions. You WILL gain confidence from paying off your house. It is a huge accomplishment.

  6. Ownership. Pride in ownership is another immeasurable benefit.

  7. Control your own escrow and pay your property taxes on your own schedule. This will allow you to pay two years worth of property tax in one year to maximize your tax deductions.

If you are still on the fence trying to decide whether paying off a mortgage is the right thing to do consider the following question.

Are your investments diversified? Paying off a mortgage, while not having any other investments or an emergency fund is not a good asset allocation plan. A better choice may be to split the money three ways: add a little extra to the mortgage payment each month, save a little to an emergency cash fund and invest a little in equities.

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