According to the Mortgage Professor, the real rate of return when you pay off your mortgage is the nominal interest rate, e.g., in your case, 6.5%. The Mortgage Professor is emeritus from Wharton, so he's credible.
decisionaide.com
If you can get better than 6.5%, don't pay it off, otherwise, pay it off.
As for the tax consequences, in a retirement fund you don't pay tax on your gains, so if you bought T-bills in an IRA that paid 6.5%, you'd get the 6.5% return double tax free, just like paying down your mortgage principal. But I don't know any T-bills or the like paying 6.5%.
I think if you put the money into a taxable investment, you need a higher rate of return to match the 6.5% from your mortgage, say 9% or so to make it worthwhile. So I think these days it makes sense to pay down the mortgage. Unfortunately extra principal payments aren't tax deductible, but they do shorten the length of the loan. |
