Does it Really Make Sense to Prepay the Mortgage?

mortgage Prepay sense
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Does it Really Make Sense to Prepay the Mortgage?

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In the United States, consumers gain several benefits from paying interest on their mortgage. First, the government allows borrowers to deduct interest payments directly from their income. In the first five years of a mortgage, when the majority of the payments go towards interest, consumers see the greatest benefits. Not only does it reduce the total tax burden, but it can often put borrowers in a lower tax bracket, which also lowers their tax rate. In 2008, counting only the tax returns that deducted mortgage interest, the average deduction was $12,221 based on findings by the Tax Foundation. Given the substantially lower savings rates, consumer might still benefit from paying their mortgage down rather than buying a CD. Let’s start by looking at the consumers in the highest tax bracket of 35%. At the current interest rate of 4.5%, a consumer would net a benefit of 2.9% (4.5% x (1-35%)) on the money invested in their mortgage. On the surface this seems like a very low rate of return.

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