The Case for Prepaying your Mortgage

28 Pages Posted: 23 Oct 2017

See all articles by Christi Wann

Christi Wann

University of Tennessee, Chattanooga

Date Written: October 20, 2017

Abstract

Households that already contribute sufficiently to tax-deferred retirement accounts often believe that the tax break from interest expense deduction is more beneficial than prepaying a mortgage. This idea stems from a faulty assumption regarding the appropriate opportunity cost of funds. This study covers a 26-year period and shows that prepayment is optimal for this type of household when correctly comparing the after-tax cost of the mortgage and the after-tax return of the risk-appropriate competing investment. The study illustrates that interest expense savings are greater than tax deduction benefits from 1990-2016 when prepaying 15-year and 30-year mortgages.

Keywords: Mortgage prepayment, Mortgage interest deduction, Tax expenditures

JEL Classification: G21, H24, R38

Suggested Citation

Wann, Christi, The Case for Prepaying your Mortgage (October 20, 2017). Available at SSRN: https://ssrn.com/abstract=3056426 or http://dx.doi.org/10.2139/ssrn.3056426

Christi Wann (Contact Author)

University of Tennessee, Chattanooga ( email )

Department of Finance
615 McCallie Avenue
Chattanooga, TN 37403-2598
United States
423-425-1722 (Phone)

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