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Reduce Debt Or Save


The mortgage rate on a loan of $100 is 8.50%. You'd pay interest of $8.50. Therefore, if you repaid the loan, you'd have an extra $8.50 to spend or save each year.

Now, instead of repaying the loan, you decide to invest the money. In this example, let's suggest a return of 7% from your local bank. Therefore, you'd earn $7.00 income per year. But, you'd have to pay tax on that of $2.31 (assuming a marginal tax rate of 33%).

So the total extra amount you'd have to spend or save each year is $4.69.

It's obvious in this case that repaying the loan would be more beneficial. Note again that repaying the mortgage is a risk-free investment.