Should You Prepay Your Mortgage and Mutual Fund Opportunities

Have you ever wondered if you should prepay your mortgage?

In today’s show I give you the information to make an informed decision based upon your personal situation.

We take into account the analytical side of the decision as well as the emotional relief that can come from being DEBT FREE….

The analytical side of the discussion comes from a great article in this month’s Consumer Reports titled “Your Mortgage: It Rarely Pays to Prepay“. As you can probably see from the title of the article, they argue that that most people should not prepay and should instead use the money to invest. I think that Consumer Reports did a great analysis, but remember paying off your house versus investing in the stock market has many different factors beyond a simple math calculation. Depending on your personal risk threshold there are people that would prefer to be debt-free for the psychological satisfaction rather than maximize the earning potential of their investment portfolio. In today’s show I give you my insight to help you determine where you fall in this decision.

A few key facts from the Consumer Reports article…

• When comparing paying $100 extra each month towards your mortgage balance or investing in a S&P 500 Index Fund Consumer Reports provided the following results:
• After 10 years the S&P 500 investment on average produced a gain of $10,058 vs. $4,051 from the added mortgage payment
• In about a 1/3 of the 10 year periods analyzed, paying down the mortgage produced a better return. However, the difference was pretty meager ranging from $1 to $2,799 of an advantage for prepaying your mortgage.
• When the S&P 500 investment beat the prepayment, it did so by $70 to $16,763
• It should be noted that when you extended the analysis out to a 15 and 20 year period of home ownership, the S&P 500 investment had the advantage 100% of the time. The average dollar gains from the stock investment grew from $10,058 in the 10 year analysis to $19,613 in the 15 year and $41,931 in the 20 year analysis.

Please note that this was primarily a mathematical calculation and there is much more that should go into your decision of prepaying your mortgage. You should also take into account:

• Your risk profile
• Your tax situation (if you make enough money that the Mortgage Interest Deduction is reduced or eliminated by AMT tax then you have more to consider)
• How close you are to retirement
• Upcoming cash needs (investments are much more liquid then real estate)
• Peace of Mind factor…

**Fund Managers are using this time of volatility to welcome new investors**

I also wanted to let you know that with all of the volatility in the financial markets there are some very well know Mutual Funds that have been closed to new investors for a number of years that have reopened to new investors. Below I have provided links, so that you can research each of these options:

• Dodge and Cox Stock (DODGX) and Balanced Fund (DODBX) – Large Cap Value Fund
• First Eagle Global (SGIIX) and Overseas (SGOIX) – Global and International Equities
• Royce Low-Priced Stock Fund (RYLPX) and Royce Opportunity Fund (RYPNX) – Small Cap Investments

Thanks and see you next week!

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