Pay Down the Mortgage or Save for Retirement? Which is better in my situation?

Fern · #1 (**permalink**) 01-24-2006, 12:57 PM

I guess this question has been asked before, in various forms, but i think the answer also varies according to individual circumstances.

So, what do you think, if i have extra money, should I:

* make extra payments toward a 6% fixed mortgage of about $86K?

* increase my current 401k contribution from 7% to 10%

* do both?

I am single and 46, no other debt other than the mortgage. I admit that paying off the mortgage has a strong ppsychological appeal to me.

I've seen some people argue against paying down the mortgage in order to preserve theincome tax deduction on the mortgage interest. This has always seems am illogical point to me since the idea of incurring mortgage debt is not to continue it for the sake of a tax writeoff. Agree?

sweeps · #2 (**permalink**) 01-24-2006, 01:02 PM

Financially it doesn't make sense to pay extra on the mortgage. You're right, the tax tail shouldn't wag the investment dog, but look at the numbers. Extra money put in your 401k should earn about 9% a year. Extra money toward your mortgage will earn you about 5% a year (adjusted for tax deduction).

The psychological boost is a different story. If you'll be a happier person with no mortgage payment, isn't that what really matters?

Fern · #3 (**permalink**) 01-24-2006, 01:04 PM

Thanks, sweeps. Your posts are always so sensible.

Yeah, the other concern was that if i don't continue prepaying my mortgage, id' be about 63 before paying it off. I'd like to have it paid off in my 50s.

Fern · #4 (**permalink**) 01-24-2006, 01:12 PM

Oh.....i don't plan on staying in my current job for more than another year or so. I've only been here 2 years now, so even after a 3rd year, i won't be vested at all, i don't think, or perhaps just 20%. That makes that route a bit less desirable, tho there's still the tax-deferred benefit of course.

sweeps · #5 (**permalink**) 01-24-2006, 01:27 PM

I think either way, things will work out well. The important thing is to avoid "paralysis by analysis". Increase your 401k contribution a little (or optionally open a Roth) and increase your mortgage payment a little. That way you've hedged your bets.

Nice avatar, by the way.

jmjj215 · #6 (**permalink**) 01-25-2006, 06:12 AM

Fern, your avatar threw me - I thought we had a new member on the board! It sounds to me like you want to pay off your mortgage a bit more? Either way you're going to be doing great!

Fern · #7 (**permalink**) 01-25-2006, 09:06 AM

Thanks everyone.

I took a middle of the road approach. I boosted my 401k contri. from 7% to 10% and will continue the extra $200 monthly payments on mortgage.

By the way, i overlooked another huge benefit of paying off the mortgage which i'm surprised no one mentoned here....by making prepayments, I'm saving MANY THOUSANDS of dollars in interest payments.

(I got tired of my old avatar, plus someone apparently thought that was my picture.)

Ima saver · #8 (**permalink**) 01-25-2006, 10:03 AM

Fern, that is what I have been doing. I took out a big loan to me, of $64,000 to buy a beautiful piece of property. (I put down 20%) Every month, i have paid at least $1000 extra on the property, so that after 12 payments, I owe about $37,000. My interest has gone from $400 a month to $200 a month.
I have had my house paid for since in my early thirties and nothing feels bette than that. (except eating an entire pound of chocolate fudge)

flash · #9 (**permalink**) 01-25-2006, 12:09 PM

Fern, it sounds like you are right on track.

Even if you don't vest to receive the company contribution, the money you invest in 401K is pre tax, and if you have choices in how you manage it, you can make a good return. It's also a safety net.

Paying off the mortgage is not a bad thing. The tax benefit from interest payments is higher in the early years of the loan, when most of your payment goes towards the interest. The advantages of having more equity, less debt, and more freedom, as well as psychological, are also important to consider. Also PMI...

We put down 20%, made the monthly payments plus a bit extra for 6 years, then paid it off. Hubby got his tax credits, I got peace of mind that I wasn't going to be paying off a debt while I was retired/limited income.

Fern · #10 (**permalink**) 01-26-2006, 10:11 AM

Yup. I'm in year 6 or so on the mortgage (really year 10, but i refinanced and set back the clock), so i think prepayments are still worthwhile.

Ima saver · #11 (**permalink**) 01-26-2006, 10:13 AM

I am just starting on year 2 of my land mortgage, but if I continue to pay $1000 extra each month, I should have it paid off in 3 years.

TBH · #12 (**permalink**) 01-26-2006, 12:22 PM

I'm almost done with year 2 of a 20 year at 5.25. I prepaid in the first year--usually about 50 or 100 per month, and I threw 1000 at it at the end of the year when I had some surplus. But things were so tight, and we're not contributing regulary to our emergency fund, so my spouse talked me out of continuing to prepay. Also, I'm thinking of moving out west temporarily in about 3 years, and I'd rent out our house til we decided whether to stay out there. So I'm thinking I'll really appreciate being able to deduct that interest then.

I'm glad, though, that I was able to prepay a little a the beginning, because that way I'm getting the benefits of that in the form of reduced interest for the remainder of the loan.

I still prepay $10 per month, but that's all I can manage.

Ima saver · #13 (**permalink**) 01-26-2006, 03:21 PM

I think prepaying anything you can helps. I had a real good book about this and loaned it our and never got it back. It was written by a guy named Marc ??. Anyone know?

kristinecfp · #14 (**permalink**) 01-26-2006, 03:47 PM

These are great posts! The only thing I would like to add is that we are experiencing historically very low interest rates. I doubt that I will ever have the opportunity to have a 6% mortgage again. So, in most cases (there are always exceptions, and the person very close to retirement is probably one of those exceptions), I think you should take advantage of these historically low rates by using your extra money to invest towards your retirement instead of paying down your mortgage. If you can do both, great! But if you have to choose between the two, I would recommend that you save more towards your retirment compared to paying down a 6% (less when you consider the tax benefits) mortgage.

Fern · #15 (**permalink**) 01-27-2006, 08:34 AM

As it happened, i came across an article today that speaks directly to this question....

http://news.yahoo.com/s/usatoday/200...ffyourmortgage

Belindac · #16 (**permalink**) 01-27-2006, 08:40 AM

I think you should increase your deductions to your 401K every year until you are maxed out And pay down your mortgage. Most people can find the extra money when they look hard at how they are spending their money. Anyone ever read 'Tightwad Gazette'? It is probably out of print but you can find it at your local library. Great way to find that extra money.

sweeps · #17 (**permalink**) 01-27-2006, 08:40 AM

Great article, Fern. I like the question: "Do you consider yourself a financial wimp?"

Ima saver · #18 (**permalink**) 02-01-2006, 10:33 AM

My father died suddenly when my mother was in her 40's. Having our house paid for got us thru some really tough times. I guess that is why I am so against having a mortgage. It is my mind set.

Snoopy2645 · #19 (**permalink**) 02-02-2006, 10:01 PM

I am with IMASAVER I think I would feel better with the mortgage being paid for because if something happened to my husband or me we would be ok with the 3 girls we would always have a place to live.

The main reason I want mine payed off is I have no one to go back too if I cant pay my bills & with 3 kids I really need to be able to take care of us.