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By John Spoto

For most Americans a home mortgage is their most significant financial liability and paying it off is a high priority. Those fortunate enough to have savings or income beyond what is needed to pay living expenses should consider the financial and psychological benefits of paying the balance down early. The advantages of accelerating the paydown of a mortgage are the potentially substantial savings on interest payments and the reduced stress of carrying debt. The downsides are having less money to deal with financial emergencies and devote to your investment portfolio and perhaps for some taxpayers, the elimination of the mortgage interest deduction.

In the simplest terms, a mortgage is the opposite of a certificate of deposit (CD). With a mortgage, you are the borrower and pay interest to the lender who is the bank. When you own a bond or CD, you are the lender and receive interest payments from the borrower, the bank.

In theory, the decision of whether or not to use savings, current income or some combination of the two, to pay down your mortgage, hinges on the interest rate you are paying on the mortgage and the interest rate you are earning on your savings. If your mortgage interest is higher than your savings interest, then you should consider paying down your mortgage. Conversely, if you can make more money by keeping your money invested than you can save by paying off the mortgage early, it’s probably not worth accelerating your loan payments.

In theory, it’s simple. Do not lend your money out at a lower interest rate than you’re paying to borrow it. In practice, it is a little more nuanced. There are additional questions to ask yourself before deciding whether paying down a mortgage is the best way to put the extra money to work or if there are other options that will yield a better return.

Let’s examine those questions.

* Does your employer retirement plan offer matching funds?

If so, are you contributing at least the amount your employer will match? This is “free” money and will grow tax-deferred. You won’t get a better deal anywhere.

* Are you carrying high-interest debt?

If you are, pay it down as soon as you can. Next to your employer matching funds, virtually no risk-free investment will give you returns to match the interest rate you are paying on these loans.

* Do you have a sufficient emergency fund?

Make sure you have enough cash reserves you can easily access in case a large unexpected need arises. The goal should be to have about one year of living expenses for a working family. For retirees, a reasonable target is to take the difference between your after-tax income from predictable sources such as Social Security, employer pension and rental income (if applicable) and your after-tax living expenses and multiply that by 2. The rationale … regardless of what happens in the financial markets, you have two years of living expenses “in the bank.”

If you do your homework and weigh the pros and cons carefully, paying off your mortgage could be one of the smartest investments you can make.

This article is for general information purposes only and is not intended to provide specific advice on individual financial, tax, or legal matters. Please consult the appropriate professional concerning your specific situation before making any decisions.

John Spoto is the founder of Sentry Financial Planning in Andover and Danvers. For more information, call 978-475-2533 or visit

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