It just doesn't seem right, since paying off my mortgage early saves me over $200,000 in interest.
According to Washington Post, Capital Gains Tax will increase from 15% to possibly 25%. Not pleasant news to us investors.[/color]
Paying off your mortgage may "Save You $200,000 in mortgage interest", but the bigger issue is how much does it costs you in "Portfolio Gain".
If you have a $600,000 mortgage and pay it off over 30 years at 3.5% mortgage rate, then you will pay approximately $370,000 in interest over the 30 years. If you choose to make an additional $1,500 per month mortgage payment, then you will cut the 30 year mortgage down to 188 month mortgage and you will pay approximately $178,000 in interest.
So by making an additional $1,500 payment per month, you "save" $192,000 in interest. Close to your $200,000 savings that you mentioned.
So how does $1,500 per month going to your mortgage cost your portfolio over time?
That depends on what return you have over a 188 month/close to 15.5 year time frame.
Starting with 0, your portfolio would grow to the following at the following yields:
11% = $746,000
10% = $677,000
9% = $615,000
8% = $560,000
7% = $510,000
6% = $466,000
5% = $427,000
4% = $391,000
3.5% = $367,000
In 188 months your mortgage would be 0 if you made extra payments of $1,500 per month or it would be $367,000 if you paid $0 extra.
188 payments of $1,500 = $282,000 of capital
So the taxes would be calculated based on the return - $282,000. IE 11% = $746,000-$282,000 = $464,000 gain. 25% of the gain = 25% of $464,000 = $116,000 of taxes if you cashed them all in at once. You would probably manage taxes better. $746,000 - $116,000 = $630,000. Subtract off the mortgage that you still have of $367,000 and you have a benefit of $263,000.
After your tax rate of 25%, the results would be as follows:
11% = $263,000
10% = $211,000
9% = $165,000
8% = $124,000
7% = $86,000
6% = $53,000
5% = $24,000
4% = $-3,250
3.5% = -21,250
This is calculated at a very high capital gain rate of 25%, and not managing any taxes. Just cashing out in 188 months, and many other assumptions that don't make sense. The biggest one is all the current tax benefits that you get by itemizing your taxes and claiming your home mortgage deduction.
Using the current 15% tax rate would result in:
11% = $309,000
10% = $251,000
8% = $151,000
7% = $109,000
6% = $71,000
5% = $38,000
4% = $7,650
3.5% = $12,750
Again with managing your realization of the gains you should be able to bring down taxes even further and again this does not take into the benefits of having the home mortgage deduction on your tax return while you are still paying high tax rates while you are working.
So over a period of 30 years, if you can get anything above 4% you are better off keeping your 3.5% mortgage as long as possible.
I am confident that I can get above 4%, if I can't then I would probably be earning a 0% return after inflation. If we have that then our Safe Withdrawal Rate would be close to 1% which would cause significant issues to everyone. A 30 year fixed rate mortgage is a great hedge against inflation. The Government is giving those who take it free money to jumpstart the economy. Those who pay it down faster than required are foregoing the government's gift to homeowners.