Should I lower my mortgage or put my money in a Franklin Tax Free account?
I live in Nevada and I am retiring at the age of 68. Am I better off putting an extra $100,000 toward my mortgage to lower payments about $500 per month, or putting the money in my Franklin Tax Free account to receive approximately $350 per month tax free?
This a question that may be missing some information. Typically a large prinicple payment to a mortgage would not reduce the payments fgoing forward only shorten the life of the loan.
Before you even consider these options, I would contact your mortgage lender and confirm that this payment would in fact lower the payments. This is not a common occurence.
In addition, it would be important to know the mortgage interest rate.
I would consider asking this question again with some additional fact to help those answering guide you or find your self a fiduciary advisor like me to help guide you through this decision making process, where you will need to provide additional information.
Some of the important factors are:
1) Current interest rate of the loan
2) How long do you have left on th eloan
3) Will the loan payments actually be reduced by a large principle payment.
4) What tax bracket are you in? This will help determine if a tax free fund is even something to consider or if you would be better of with a taxable bond investment.
Best of luck in this process.
Paying off a mortgage can make more than financial sense; it can provide financial peace of mind. It would be helpful to have more information, such as the interest rate on your mortage and the expected interest rate on the Franklin Tax Free fund. The numbers that you describe in your question look like you would probably be better off paying off your home loan; than continuing to take the same amount of money each month and investing that into the Franklin Tax Free fund if you don't need it. Please feel welcome to call me with more details at (775) 332-7000.
Lowering your mortgage payment would most likely mean refinancing your loan, which comes with closing costs and is a time-consuming process nowadays. Also keep in mind that a smaller mortgage payment would result in reduced itemized deductions at tax time, so the savings gap is less than you think. There are a lot of moving parts here so feel free to contact me.
If I understand correctly, you have $100,000 and have determined that you will either pay down your mortgage or invest in a municipal bond fund. If your calculations are correct, on the surface it seems like a better deal to pay off the mortgage. Not paying $500 a month is just like earning $500 a month. So saving $500 per month is better than making $350 per month.
If we take a look at the bigger picture, this really comes down to your comfort level with having a mortgage, the interest rate on your mortgage, and the expected return on the Franklin fund you are looking at. Paying off your mortgage is the same as getting a guaranteed return. So if your mortgage interest rate is higher than what you expect to receive from your fund, then it seems to make sense to pay off the mortgage.
Getting tax-free interest has less value to you in Nevada than it would to someone in, say, New York or California, because you don't pay state income taxes. Nonetheless, if you are in a high tax bracket for federal income taxes it may be more comforting to earn tax free interest. Like most questions in personal finance, the answer depends...
To answer this question I need your highest federal income tax bracket. Without exact numbers, and if you are in the 28-32% bracket, it appears that the two amounts are rough equivalents. So, consider qualitative factors. Some people rest more comfortably with a lower or zero mortgage, some people prefer the diversification offered by investments outside of home equity. Keep in mind that your $100,000 paid down on a mortgage does not necessarily lower your mortgage payment, you may have to apply for a new mortgage in order to actually reduce your payments.