Yours truly was quoted in the Chronicle over the weekend – Does your 3% mortgage make you ‘richer’ in California — and should you pay it down?
Here’s the good stuff:
Even if you are technically saving more money, a home is an expense rather than an investment for many people, says Rick Valenzi, certified financial planner and founder of Financial Zen in San Francisco.
“You can’t buy groceries or take vacations with your home equity,” he said. “So home expenses — while often rationalized as investments by homebuyers — often end up being a consumption expense.”
Valenzi said the tax deduction helps add to a homeowner’s wealth because it increases their cash flow by saving on taxes. But only if it’s saved.
“The way we think about the deduction is it further dilutes the return on investment of paying down a mortgage,” he said. “If your mortgage is 3.5%, when you factor in the deduction it’s more like 3%. So by paying off that mortgage early, you’re locking in a 3% rate of return on your money.”
He added: “A 3% return only keeps up with inflation, so from that frame paying down your mortgage is actually detrimental to your wealth.”
