We get a lot of questions here at The Motley Fool: Is that really your name? Why the funny hats? What's that smell? Should I sell some stock to pay off my mortgage?
The answers to the first three are, respectively: yes, to hide unsightly growths, and the smeller is the feller. For the answer to that last question, read on.
If you mean "sell stock in order to meet a monthly mortgage payment" and you don't really need to sell your stock, the answer is "no." Assuming that you're in it for the long term and that your stocks are performing reasonably well -- and, more important, that you feel they have a good chance of doing well in the coming years -- you don't want to throw out your opportunity to acquire wealth over time. Better to use the good ol' paycheck.
However, if you mean, "Should I pay off a good portion of my mortgage or even the entire mind-numbing balance?" then read on. You have to consider whether it's a financially smart thing to do, and you also have to take into account your comfort level. Let's look first at the financial side.
You'll want to look into prepayment penalties (if any) in making your determination. That is, in repaying your loan early, your lender may stick you with some hefty penalties. You'll also want to be aware of any tax advantages you're going to be losing. After all, the interest portion of mortgage payments are tax-deductible. This means that your tax bill is being lowered, and you don't want the rude awakening of a Hindenburg-sized tax bill right after you've drained all that lettuce from your vegetable garden to pay off the loan.
You also need to make sure you know the taxes you're going to have to pay on your capital gains -- assuming, of course, that the stock has gone up since you bought it. How long have you held the stock? If longer than a year, you'll be taxed at the long-term capital gains rate. Otherwise, depending on your adjusted gross income, you could pay a much larger amount in taxes.
Once you know roughly what these figures are, you can start to make your decision. Think of it this way: You're considering taking a wad of dough out of the market and doing something with it. This only makes sense, from a financial standpoint, if you wouldn't be better off with your money somewhere else -- like in the market, exactly where it is already! More specifically: If the return you're earning on your investments is greater than your mortgage rate plus tax savings, then prepaying doesn't really pay.
If you're a Fool who is reasonably confident that you can do significantly better in the stock market and can, all things considered, do better in the market than the interest rate you're being charged, then stay in the market.
Then there's the personal comfort element to consider. Are you just not comfortable paying those hefty mortgage amounts each month, and you feel this great burden dragging you down each time you write out one of those checks (like Atlas carrying the world upon his shoulders)? Has your spouse noted that your grumpiness index has skyrocketed? Well, these things count. You might be a happier person just knowing that you have less in payments each month.
If you're invested in stocks and are getting heartburn from market swings -- and for some reason you're unwilling to move into stocks that gyrate less wildly than Elvis' fabled pelvis -- that counts, too.
Factor in both the financial and the personal. If one mightily outweighs the other, your choice is pretty clear.
For more on managing one of your biggest assets -- including tips on refinancing and home-equity loans -- visit The Motley Fool's Home Center.
