Home Sweet Home

 

up with their minimum down payment. To most of them, the thought of making a larger-than-required down payment is only a dream."

"That's true for first-time buyers, Roy, but not usually for repeat purchasers, because the equity they've built up in their homes over the years is usually greater than the required down payment on the house they're moving to," James Murray contended.

"Granted," Roy relented. "The questions of whether to make a small or large down payment and whether to pay down the mortgage as quickly as possible or not are really one and the same. Both are, in essence, asking the following: If you have funds available, is reducing the size of your mortgage the most attractive investment alternative?"

"No way!" Tom blurted out. "With the interest portion of each mortgage payment tax-deductible, it would be foolish to pay off the loan."

"That's right, Tom," James Murray agreed whole-heartedly. "If you're in a twenty-eight percent tax bracket and your mortgage is at eight percent, it's only costing you a little less than six percent after tax because of the allowable mortgage-interest deduction. Or stated more meaningfully, you would only be earning six percent after tax by paying it off. And remember, it's what you earn after tax that counts.

"That's why financial experts argue that paying down the mortgage more quickly than the lender requires doesn't make a lot of sense," James Murray concluded.

"Roy?" Cathy looked for confirmation.

"Let me start by saying that it is possible to do worse than a six-percent after-tax return. Especially since there are a number of other benefits to paying down the mortgage,