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"Personally, in deciding whether or not to put extra towards the principal on my house, I would compare my mortgage rate against treasury rates (since I would get taxed on treasuries and get tax deductions on mortgage interest payments, I believe that the two rates are roughly comparable). "

That is partially true.

1) If you have few itemized deductions (if your property taxes are low), you are not getting the tax benefit of having mortgage payments.

If the standard deduction is $5000, and you have real estate taxes of $1000, and maybe other itemized deductions of $500, then there is $3500 left.

The first $3500 a year of mortgage interest then gets no tax benefits. Thus, you have to subtract that amount from your yearly interest, then figure the tax benefit on that.

Many people really don't get the tax benefit they think they are.

2) However, even using the 'treasury rate', that is not necessarily a good guideline unless you intend to leave the money in the treasury until maturity. The value of the bond (treasury) that you buy can drop 30% in two years. Thus, your 'interest' on the original amount stays the same, but if you had to liquidate the bond, you would lose 30% of principle amount. TAlk to someone who had a 7% bond, when t-bill rates went up to 14%. They lost 50% of the value of their t-bills if they had to sell.

You need to use the historical returns of t-bills. Some years up 20%, some down 20%.

Of course, your house could also drop 30%. That is less likely - and irrevelant if you aren't planning on moving anyway. Then again, you should not consider your house an 'investment'. It is a housing cost. It is an asset, that has value, and counts toward net worth.

There is a lot to be said for being debt free.

Again, one doesn't have to either pay down the mortgage, or invest. One can do both, just to a lesser degree for each.


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