Tortoise Wins Again

Homeowners who pay off their mortgages faster than required in order to minimize interest expenses may not be maximizing their wealth. A comparison between a 15-year and a 30-year mortgage payout -- using constant assumptions in regard to mortgage rate, tax rate, investment rate, loan amount, and ability to defer tax -- indicates that the 30-year payout maximizes borrower wealth. The secret to deciding whether an early mortgage payoff is beneficial is to consider any payment of principal before it is due as an investment. This requires that homeowners understand their investment opportunities and the rate of return each will pay. To this end, knowledge in 4 areas should be obtained: 1. combined federal and marginal tax bracket, 2. stated mortgage rate, 3. an alternative investment rate of return, and 4. ability to defer taxes. Unrequired principal payments should be made only after all other investment opportunities with higher (risk-adjusted) returns have been thoroughly explored.