Ask Money Man

Ask the expert all of your money related questions. Email your questions to and Money Man will email his reply. Questions of general interest will be posted on this web page. Your name will not be printed unless you say you want it printed. Your identity will always be protected.

Dear Money Man:

Just finished your web book.  I have one question.  I hate to pay taxes.  If
I pay off my home I have lost my biggest tax deduction.  It appears your
underlining theme is paying off your home.  Are you sure that paying off my
mortgage and losing the itemized deduction won't be off set by paying more
money to Uncle Sam?  Enjoyed your book.  Many thanks. 


Assuming that your tax bracket is about 33% (federal and state), then your net interest rate is 2/3 of your actual interest rate. In other words, if your mortgage rate is 7.5%, then your net rate is 5%. Paying off your mortgage saves you 5% of its balance each year. Of course, if you would otherwise put the money in the bank and get 4.5%, this ends up as 3% after taxes. In this case, paying off the mortgage saves you 5%-3%=2%. Thus, if your investment interest rate is less than your mortgage rate, then you will always save by paying down the mortgage.

Reasons to not pay down the mortgage:

1) You want cash available for emergencies.

2) You want to invest in something that has a higher rate of return, even though it is riskier.

3) You want to have money for a tax free investment.

I hope this helps.


Dear Money Man:

Is it true that is you can pay 1 extra payment a year on your mortgage that
you can pay it off sooner than 30 years? If so, it there a round about of
years that it would be accomplished?

Thank you,


To give you an idea of how valuable it is to provide a thirteenth payment per year, consider a $100,000 mortgage at 7% for 30 years. This requires a monthly payment of $665. A payment of 13/12 as much would pay off the mortgage in 23 years and 10 months. Although doing this is commendable, it may be more convenient to save a larger amount of money, then pay off an integer number of years. For example, for the same mortgage, paying an extra $1018 at the beginning shaves exactly one year from its duration. You can get the appropriate dollar figure from your amortization schedule. After you make the payment, your amortization schedule is still good as long as you remember to revise the dates on it. Remember to give your mortgage company the amount of notice for prepayments that your deed of trust specifies.


Dear Money Man:

I just logged on to your web site through yahoo. I must say that you
have a most interesting site. I think I read almost all of it in about
an hour. I need help with two things;
a)      I had purchased a new car about three years ago. Unfortunately I
didn't make the payments, so the good ol' repo man came and took it.
When they took the car they auctioned it off but I still owed $4,500
on the loan. How, or what do I do to make this right on my credit
b)      Will this affect my chances of purchasing a house in the near
future( one or two years from now)?


To see how much damage is done, you need to see your credit report. Several companies maintain credit reports and it is not obvious which company your mortgage lender will use. You might want to look at just one credit report, the one most likely to be used. It is possible that the most likely one is Experian (formerly TRW), . In some states, you can get your credit report for free. You will probably find that they are missing some credit information about you, such as your favorite credit card. If they are missing your defaulted car loan, then you lucked out only if your mortgage company uses this credit company exclusively. If the report mentions your car loan, you have the option of adding your explanation of what happened to the report. This would be worthwhile only if your lender is at fault, in other words cheated you.

I suspect that you will conclude that it is not worth it to chase down all of these credit companies. If you have a large down payment on the house, that will work strongly in your favor.



Check out previous Ask Money Man columns:


Copyright 1996 Alacrity Research