From: Sandra Loosemore 
Newsgroups: misc.invest.financial-plan
Subject: Re: Pay Off Mortgage or Invest?
Date: 8 Jul 2003 16:10:02 GMT
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"Elizabeth Richardson"  writes:

> One other thing I've thought of in this discussion
> (and thank you) is that you have to pay taxes on the earnings you're making
> on these invested dollars. How does that affect the thinking?

My own thinking is that it roughly balances out the benefit of getting
a tax deduction on mortgage interest.  However, there are a few
"gotchas"....

(1) The extra income from the invested money may push you into a
higher tax bracket or over the limit for phasing out itemized
deductions.

(2) You may not be able to deduct your mortgage interest at all on
your state income tax return, but you'll still have to pay state taxes
on your earnings from the invested money.

(3) In the long term (say, 10 or 20 years), your mortgage interest
deduction will shrink while your income from your other investments
becomes larger due to accumulation.

Of course, muni bonds are a way of getting round these problems, but do
you really want to have that much of your capital invested in muni bonds?

Personally, I'm of the opinion that the best thing to do is to divide
one's available cash between paying off the mortgage and other kinds
of investments.  I would certainly make sure I had a good-sized emergency
fund before sinking a lot of cash into a mortgage, in particular, since
it's hard to draw the money back out of a mortgage again.

-Sandra