Tuesday, October 31, 2006

Free Money Finance: Paying Off Your House Early

This topic came up in class recently so FreeMoneyFinance had impeccable timing:

Free Money Finance: Free Money Finance Top 10 Most Hated Posts/Themes: #8 Paying Off Your House Early:
"Most financial authors, writers, and bloggers would say NOT to pre-pay your mortgage if the interest rate (adjusted downward for the tax savings from having a mortgage) is below what you could earn investing the money instead. They say you'll be better off in the long run doing this, and technically, they're right. If a person has a mortgage at 5% and if they earn 6% on their investments and if they do actually invest the money they would otherwise be using to pay the mortgage (rather than spending it) then they will be better off financially. But to me, that's a lot of ifs."
Which is very well said. Like debt in a corporate setting, committing to paying down a mortgage can reduce the Free Cash flow problem.

I would add that there is also some reduction of risk since it does free up money for other uses AND also some increase in utility from the feeling of having it paid ahead of schedule.

That said, from a risk and return perspective, it does not make much sense in most cases and I would definitely not encourage it in the case of investment property.

If you would like more in this, check out the MortgageProfessor's Paying Early Page.

1 comment:

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