Paying Off a Mortgage isn't Always the Way to Go

There are two schools of thought when it comes to paying off a mortgage. The first school of thought thinks that the faster you pay off your mortgage, the less you pay and you get rid of the debt. The second school of thought believes your money is better spent elsewhere--make the monthly mortgage payment, take your tax write-off and use the "extra" money to invest in something that brings you a greater return than the after-tax interest rate you're paying on your mortgage.

Which thought process is better? Both have benefits, but put your personal opinions aside for a moment and ask yourself the following questions.

1. Realistically, how long am I going to live in or own this home?
2. How much mortgage interest are you writing off on your taxes?
3. What investment options are available to earn a higher rate of return than what you're paying on an after-tax basis on your mortgage?

Now, let's tackle the answers to these questions one at a time.

1. The national average for Americans to live in or own a home is five to seven years. After the five or seven years, sometimes in less than five years, we move, we well the home, we buy a new home or return to renting.

Now, if you take a look at the amortization schedule on a 15 or 30 year mortgage, for example, you are paying mostly interest for the first half of your mortgage, which works since we are only living in them for five to seven years anyway. It's like renting with a tax deduction!

2. The ability to deduct the mortgage interest from your taxes varies from situation to situation, so you need to speak with your tax advisor about your own personal write-off. Generally speaking, the entire interest portion of mortgage on a primary residence is fully tax deductible. This may be one of your biggest tax deductions. It some cases, it may be one of your only tax deductions, so why would you want to get rid of it?

3. In today's economy you may be hard pressed to find an investment that brings you a greater rate of return than the after-tax rate of your mortgage. This isn't and won't always be the case, however. And it's important to remember that once you sink your money into the home it is gone until you sell the home or tap into the equity of the home with an equity line or loan.

What if there is an emergency? What if you can turn a profit by buying a new piece of real estate and renting it out? What if you can invest your money in a mutual fund that brings you a greater return than you're paying out on your mortgage?

If you've already spent your money paying down your mortgage, then the opportunity for you is gone unless you want to pay a lender to allow you to tap into the equity.

These concepts don't apply to everyone. This is not a one-size-fits-all solution, but a mortgage is seen as a good debt because of all of the benefits associated with it. A credit card, however, is considered a bad debt (not tax deductible and extremely high interest rates). If you want to use your money to pay something off, get rid of your bad debt instead and leave your good debt working for you.