Retirement & Financial Planning Report

If you have no credit card debt or only an easily manageable amount, should you pay down your mortgage? There are two parts to the answer:

The numbers side. If you have, say, a 6 percent mortgage, paying down the mortgage generates an after-tax return of around 4 percent. The exact number will depend upon your tax bracket, your state and local income tax rates, and whether you owe the alternative minimum tax.


Does it make sense to pay down a 6 percent mortgage for a risk-free 4 percent return, after-tax? Yes, if you have large amounts of money in money market funds and other accounts paying very little yield now. Otherwise, you have to decide whether to prepay your mortgage or invest elsewhere, in hopes of earning annualized returns higher than 4 percent, after-tax.

The emotional side. Some people, especially retirees and pre-retirees, prefer to prepay a mortgage rather than investing. Not having a mortgage may increase your feeling of financial security after you retire. If you’re in that category, paying down your mortgage might be a good decision.

If you don’t have sufficient cash sitting around to pay off your mortgage at once, you can accomplish the same goal more gradually. By paying an extra amount of principal each month, you can pay off a mortgage in half the time. Each month, pay an additional amount equal to the next month’s principal payment. Get an amortization schedule to see exactly how much to pay. Then each succeeding month, add the following month’s principal amount. Your interest savings will be substantial, as well.