In light of a recent dialog with a client regarding a 2nd home purchase, I was inspired to repost this. A large down payment is a form of prepayment, and it is extremely important to know the implications of putting a large amount of money down and its effects on the mortgage interest deductibility of the property. If the purpose is to meet a cash-flow objective for the property, that is certainly fine as long as it's put through the client's financial "opportunity" filter. In the span of two months, earlier this year, both Money Magazine and Consumer Reports have issued the question - "Should you prepay your mortgage, or invest?" It is interesting that both magazines would ask the same question, and more interesting still that both would come to the same conclusion. We've been asking that question a long time and believe it is still a key question worth asking. Wile we can't say they did an exhaustive study here, their overall approach was sound.
In our Borrow Smart approach, we don't believe there is a one size fits all. Market Risk and Discipline Risk must be considered for the individual borrower. The math itself is pretty simple. Historically over any extended period of time, it has been much more beneficial to invest excess cash flow than it would be to prepay the mortgage, but this is based on average market returns and average costs of borrowing - the longer your time horizon the more likely you are to be average in those respects.
There are of course many other facts to consider, but at a minimum I wanted to make you aware of these these two articles and how they approached their recommendation to invest, instead of repaying over time.
Consumer Reports - Download "It rarely pays to prepay"
Money Magazine - Download "The feel-good choice isn't necessarily the smart choice"
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