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Jonathan Clements on Mortgages
By JLP | May 23, 2007
I know I have been writing a lot lately about mortgages and all the issues surrounding them. It’s not my intent to beat a dead horse, but I do want to draw your attention to this Getting Going column titled Why a Mortgage May Be Your Best (and Worst) Move (free). Clements says basically the same thing I have been saying all along: use your mortgage to your advantage, but use it wisely. I thought this quote was interesting:
Economists Gene Amromin, Jennifer Huang and Clemens Sialm found that, among households striving to pay down their mortgage quickly, at least 38% could be stashing more in their employer’s 401(k) or 403(b) plan. That means these folks are missing out on their 401(k)’s initial tax deduction and tax-deferred investment growth. That combination should easily outpace the interest expense they save by paying down their mortgage.
Throw in a matching employer contribution, and the 401(k) would be even more compelling. Similarly, you could probably improve returns by taking money earmarked for extra mortgage payments and using it to fund an individual retirement account or to buy stocks in a taxable account.
Clements does say that there are times when prepaying a mortgage makes sense and that’s when the alternative to paying off the mortgage is investing in bonds or money market funds in taxable accounts due to the after-tax returns on that money.
Finally, Clements and I agree on another thing: don’t take on more mortgage than you can afford. I don’t want people to misconstrue my thoughts on mortgages and think that I’m advocating taking out as big a mortgage as possible.
Topics: Getting Going, Jonathan Clements, Mortgages |