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Mortgages Can Help, Rather Than Hinder, Finances

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By Dan Serra

RISMEDIA, June 29, 2010—(MCT)—While most financial-savvy consumers do their best to avoid debt, one debt that is unavoidable to many families is a mortgage. Because many of us feel more in control of our home and expenses without a mortgage, a common question is whether to pay it off as quickly as possible.

The answer depends on each person’s financial situation. A mortgage can actually be a blessing to some.

For example, mortgage interest is tax-deductible. This deduction saves taxpayers about $103 billion a year, according to the U.S. Treasury. The benefit is less to owners of low- to moderate-valued homes who may not have much interest or enough to claim it by itemizing deductions. But for families with a higher net worth, it allows a tax savings and may encourage them to buy larger homes.

With tax brackets for the wealthy rising next year, this tax break becomes more valuable. When the break is included, a 6% mortgage could have a rate closer to 4% in reality. Calculate your mortgage’s effective rate by subtracting your tax rate from 100 and multiplying that number by the interest rate. For example, a 28% tax bracket with a 6% mortgage would result in (.06 x 72) to equal the equivalent of a 4.32% mortgage rate after considering tax savings if itemized. That helps the interest look less daunting.

In addition, with the possibility of investing with a goal of a 5 or 6% return, instead of putting that money into a mortgage, the homeowner could get a return higher than the effective rate, which could help grow net worth. On the other hand, if the effective rate is higher, it may make sense to pay down the mortgage.

Another situation that makes paying off a mortgage attractive is for someone at risk of bankruptcy. Many states offer protection from creditors seizing a home to pay debts. If a home is paid in full, it is more likely the owner could stay in it if he goes broke, providing he can pay for the upkeep.

Money taken out for a mortgage also could reduce net worth later in life. The potential for higher investment returns are gone; that money will not be able to grow if investments grow over the long term. Not to mention having too much invested in a house. That could be detrimental at retirement. While we can get a loan for a house, there are no loans to finance retirement.

(c) 2010, McClatchy-Tribune Information Services.

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