Campbell's attempt to answer is so bad, she should be...I don't know, not published by US News and World Report??
Assume a $500k house, $450k mortgage at 5%, real estate returns 5%, other investments return 8%, and you have a 25% tax rate.
Here's her analysis:
Scenario 1: You pay off your mortgage. Since there is no loan, and no investment other than your house, both your investment money and your house value increase at 5 percent (the rate of return on real estate). Your total increase is $25,000.
Scenario 2: You owe $450,000 (90 percent of your home's value). In this scenario, you have a $450,000 note with a 5 percent interest rate. The cost to you is $22,500 per year in interest. But since you are able to deduct the interest on the note, the real cost, assuming a 25 percent total tax rate, is $16,875 per year.
Remember, you will also have the $450,000 that you would have used to pay off your mortgage invested. Assuming the above 8 percent return on investment, this will give you a return of $36,000. Net out what you make and what it costs--$36,000 less $16,875--and you earn a $19,125 return each year.
Brilliant! If you borrow money to invest, and prices rise, you make more money. If they don't, you have a problem. Her closest concession to reality: "It's very important to have investments capable of achieving an 8 percent return..." Holy cow, that's an understatement!
Should we be surprised? Probably not. I am sure Ms. Campbell has many clients asking a very reasonable question: "Why am I giving you money to manage when I could simply pay down my mortgage?"
That's a complicated question that can be very hard to answer.
I guess the easy answer: The Campbell household needs to eat too.
I have read this several times, and am missing your point. Which option are you advocating? I for one would opt for the pay off, since this is the lowest risk, and would allow me to keep my home if the economy ranks again.
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