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Why you should (and shouldn't) pay off your mortgage

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The question comes to investment adviser Jim Miller in various guises, but it comes frequently and it boils down to this: Is money better used to pay down debts or to build an investment nest egg?

Most often the inquiry involves a home mortgage. The other day, Mr. Miller says, it involved a pickup truck.

A client had just bought a vehicle, and wondered if he should pay for it by selling some investments. Miller asked him first to check what rate of return those investments had achieved over the past few years. The exercise prompted the client to change gears: He took out a loan for the truck so that he could keep more money invested.

The equation doesn't always work out that way, Miller says. Sometimes "eliminate debt" wins over "invest."

But the question is central to American family finances today. Household debt has reached a historic high, while personal savings are running low for many.

Interest rates add another wrinkle to the pocketbook puzzle: A recent rise in rates means that investors may be able to earn higher interest on a certificate of deposit than they're paying on their mortgage. In such cases, plowing free cash into investments may be more lucrative than paying down the mortgage.

"My take on it is pure bottom line," says Miller, a registered investment adviser in Columbiana, Ohio. "If in fact the rate that they're paying on a loan ... is substantially less than the rate that they're earning on their investments through real life experience, I encourage them to extend the mortgage as long as they can."

The phrase "real life experience" is key.

Some people invest on their own, others with help from a broker or adviser. But either way, it's important to gauge whether your money has been earning 10 percent or 3 percent annually - after averaging out the good and bad years. The rate of return is crucial, but just one of several factors in deciding whether to invest money rather than use it to pay down a mortgage.

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