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A Different Option to Paying Back Your Home Loan

While I am not a huge fan of the following strategy, it's been popular among some financial pros. This plan of action entails the idea of keeping the mortgage on the home while making the minimum regular payments. If you have extra capital, this plan of action suggests that you should not pay off your mortgage whether or not you have the means to do so.

Firstly, permit me to begin by claiming that your home loan payments are not the actual cost of your monthly payments. Your actual costs should include the amount saved from income taxes factored in. Interest from your home loan is a deductible expense and the money you can subtract depends upon what level of interest expense you paid out and which income tax bracket you're in. When you do your income taxes, your tax preparer should let you know how much money your house is saving you in income tax. You may also subtract state taxes dependent on which state you reside in. Having said that, you should not engage in a long term financial plan that is based upon tax law. Since most home loans are amortized for for thirty years, the possibility is fairly high the laws you're counting on will be modified several times.

Going back to the equity separation strategy, it's suggested that any extra money you have should be put to work in another asset. People who advise this strategy also positively think that you will be able to obtain an alternative investment that is the same as or larger than the interest rate you're paying on your home loan. In the existing economic environment, that's not always so.

For the long run, the stock exchange has generally returned about 6% per year. Of course, the historic average return will rely upon your beginning and exit point. The main concern here is the indisputable fact that financial markets can go into long-term slumps. For example, the previous ten years has had lower than average investment returns for most investors. Remember, 6% is simply an average.

If you opt to incorporate this plan and remove the equity from your property, there are two important things you need to consider. Firstly, calculate your net cost of your mortgage payments adjusted for income tax savings. Second, carefully research your alternatives with your extra money. It is critical that you keep in mind your own risk tolerance and how much you plan on returning with your prospective investments.

Eileen E. Jacobs is a tax consultant with more than 30 years experience in tax preparation. Tax Preparation Services Las Vegas

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