If you have not yet done so, please read part 1 of this series first, then read on.
Last week I offered some discussion as to whether or not one would have any reason to pay their mortgage off early. This week I’ll briefly focus on one aspect of this decision – the after tax cost of your mortgage vs what you’d expect to earn elsewhere.
Most of the MMA examples offered start with a 6%, 30 yr, fixed mortgage. Now, if one is in the 28% tax bracket, their after tax interest cost is 4.32%. In my state, (Massachusetts) the tax exempt fund now yields 4.2%. From the chart of Fed Funds Rate below,
does it look like rates can continue to fall? As rates creep back up, and you can earn more than your mortgage costs you, after tax, why would you choose to pay down the mortgage? If you lost your job, and the banks freeze further loans from your HELOC, would you rather have a paid off house or two hundred grand sitting in tax exempt muni bonds?
I also suggest you look at the Money Chimp site, and note that in the 10 year period 1998-2007 the average return of the S&P was 6.7%. Had you invested in a low cost (.1%/yr) index fund, you would have seen 6.6% during that period which contained the crash associated with the bursting dotcom bubble. If you are disciplined enough to send all of your disposable income to your mortgage (through the HELOC account) then I believe you are disciplined enough to use those same deposits into an S&P index and dollar cost average into the market for the long term.
Next week – the process of using an MMA account