Dr. Doherty makes a commonly used quick comparison in the July Money Smart that may be handy, but is not really fair. If one prepays a mortgage, then that mortgage payment is now free to invest in the "magic of compound interest."
In Dr. Doherty`s example, at the end of the 8.75 "prepayment years," the investor is ahead. However, he has 22.25 years of additional mortgage payments. A fair comparison takes this into account and considers investing the payment and the prepayment for the rest of the 30-year mortgage.
By my view, the prepayment choice is far better. The mirage of tax savings is a farce. I had it clearly explained to me as follows: "If you want or need to spent it, a deduction is only a discount on it. If you don`t want or need to spend it, don`t spend it because you always will pay more for it than you will save in taxes."
As far as tax savings lost over the remaining years of the mortgage are concerned, one would do better hiring a talented CFP like Dr. Doherty to boost after-tax returns with other tax-favored instruments or a more aggressive portfolio.
Barry Parish, DDS
Benicia, CA
