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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 |
May 23rd, 2007 at 2:39 pm
Good post. I can’t think of many cases in which pre-paying a home mortgage makes much sense.
May 24th, 2007 at 10:23 am
Good article! I know that contributing the max to our 401(k)s and Roth IRAs has served us well. Missing out on the tax benefits of those two vehicles is probably one of the biggest financial mistakes a person can make.
May 24th, 2007 at 2:04 pm
What this says about mortgages vs 401(k)s is all too true financially — as is the advice about not borrowing more than one can afford. But the nature of the owner-occupied mortgage is that often decisions are made on other-than-financial grounds. After all, one’s home is more than an investment.
Prepaying a mortgage may make less sense than investing, but for some people the idea of owning their homes free and clear can be more compelling than free money from matching funds. I am not saying that that is financially prudent, but it is an honest response to the issue.
May 25th, 2007 at 7:11 pm
How soon we forget! Remember the late 70s and early 80s - stocks had been down for quite some time and mortgage interest rates were well in the double-digits - in that environment I’m sure everyone was telling you to pay down your mortgage and avoid stocks!
-Frank
May 26th, 2007 at 11:45 am
[…] JLP takes a look at Jason Clements view on mortgages. […]