Most people who have mortgages dream of a day when they won't. In fact, many mortgage-holders speed up their payments to make that day arrive sooner. Is that smart, from a financial standpoint? Not necessarily.

This point is highlighted by a 2006 study prepared by economists for the National Bureau of Economic Research. About 38 percent of U.S. households are making the wrong choice when they speed up their mortgage payments rather than use the extra money to save in tax-deferred accounts such as 401(k) plans or IRAs, according to the study. These households are giving up a yield of 11 to 17 cents for every dollar they spend on extra mortgage payments, depending on their choice of investments in a tax-deferred account.

While these survey results are certainly interesting, they don't tell the whole story on the issue of making extra mortgage payments versus investing. If you have a quantitative nature, however, you can do a little analysis on your own. For example, if you were to pay down a mortgage with a 5.5 percent rate, it would be essentially the same thing as earning 5.5 percent on some type of investment. But if you are in the 25 percent tax bracket, and you deducted your mortgage interest payments from your taxes, your 5.5 percent mortgage would really "cost" you just 4.125 percent. So, if you could find an investment that paid more than 4.125 percent, you'd come out ahead by investing, rather than paying down your mortgage. (Keep in mind, though, that you may have to pay taxes on your investment.)

It might not be that hard to find an investment that pays more than your after-tax mortgage rate. But that's not the only reason why it may make sense to choose investing over mortgage reduction. Here are two other factors to consider:

• Paying off your mortgage early won't boost your ultimate return. Obviously, you want your house to appreciate in value. But paying off your mortgage early won't make your home worth more, though it will enable you to pocket more of the proceeds when you sell. On the other hand, the more shares you purchase of an investment, such as stock, the greater your potential for boosting your net worth. Of course, investing also has its risks; when you sell your stocks, you could receive more or less than the original investment amount.
• Investing provides you with greater liquidity than paying down a mortgage. Once you make extra payments to your mortgage, you can't get at that money, except indirectly, through a second mortgage or home equity loan. But if you were to invest the money instead, you'd have access to it (though, again, you might have tax implications). This liquidity could be important if you lose your job or if you face an unexpected financial need, such as a major medical bill.

Still, there's another side to the mortgage/investment issue. If it just makes you feel better to whittle away your mortgage - or possibly pay it off altogether - that's something to consider. And if you're close to retirement, it may make particularly good sense, from both the psychological and cash flow perspectives, to get rid of that mortgage.

So, weigh all the factors carefully when deciding whether to pay down the mortgage or invest. Your choice can have big consequences for your future.

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