Paying off Mortgage earlier?

Question

I have paid off my credit cards. I now have around $2000.00 a month on hand. Will I be better off paying off my mortgage earlier by adding this extra payment or putting that money in a 401K type of plan that my employer has. If I stick to the plan I will have my house paid off in 9 years and saved a ton of money in interest.

Answer 1

If it was me, I'd pay off that mortgage first. Investing is always a good idea, so why not invest in that house!!!

Answer 2

If your employer will match some or all of your 401k contributions, that would probably be your best option. For example, if I contribute 6% of my pay to the 401k plan, my employer will match half of what I put in. That's an immediate 50% gain on my investment, far more than I'd benefit from putting that money towards a mortgage.

Also, your 401k contributions are exempt from income tax and Social Security tax, which saves you another 20-30% or so depending on your tax bracket. That is a benefit you don't have when paying the money towards your mortgage.

It also depends on your mortgage interest rate. If all of your mortgage interest is tax-deductible (that will depend on how much you have in other deductions), then your "real" mortgage interest rate is 15%-28% less than the stated rate.

It's also important to have funds available to you in case of a financial crisis (job loss, disability, etc.). If all your assets are tied up in home equity, it's not that simple to turn them into cash. You'd have to get a home equity loan.

There are too many variables to say for sure what the right move is for you... tax bracket, interest rate on your mortgage, the amount of matching funds your employer contributes to the 401k, how much other savings you already have, etc. I am a big fan of being debt-free but it's critical to build up funds for retirement, and a 401k is a great way to do that.

In my case, I paid some extra on my mortgage every month but not a huge amount. After taxes, my "real"mortgage rate was about 4.5%, and it made more sense for me to put the additional extra funds I had into investments because those would grow more than 4.5%. We ended up paying our mortgage off in 19 years, but our retirement savings has grown tremendously.

Answer 3

How long do you plan to own the house? That is the biggie.

RE will almost always appreciate over time. The longer the time period the better in most cases.

If 9 years dovetails with your retirement strategy - maybe you are 50? Then great I say go for it.

However, if you are young - 20s for example, that $24k per year in a 401k contributed PRE-TAX and perhaps even matched to some degree by your employer, will be BIG $$s in 40 years when you retire.

Your $24k per year might also be able to beat the mortgage rate if you put it on the street. Also, ask your CPA about Tax ramifications of no mortgage.

Answer 4

What type of mortgage do you have (arm, fixed rate) and how old are you? Ideally, i would do BOTH- set some for retirement and some for extra for the mortgage. The stock market is very volatile right now- but a good time to buy stocks or mutual funds you plan to hold onto for a long time. Paying off your mortgage would be great, but the earlier you start for retirement, the better off you'll be with time on your side. You are lucky enough to have enough extra $ to do BOTH- good job! Why not put $1k towards each a month?

Answer 5

Do you have an emergency fund of three to six months expenses on hand. It would be a shame for all your hard work to come to nothing when Murphy strikes and you have to run up the cards again. So get an emergency fund in place.

Then I'd pay off the house. Imagine all the money you'll have to invest in retirement with a paid off mortgage.

Answer 6

Both are probably pretty good options. The 401k idea is good, but does subject you to the whims of the market depending upon your distribution across the funds offered. Paying off the mortgage as you stated will save you many dollars in interest which directly affect your pocket. It might be worth doing a split between the two or being flexible to take advantage of the market and it's upside when that occurs.

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Answer 7

Do you want to see for yourself? Here is a good suggestion. Review your tax return for 2006. Get some blank tax forms but pretend you have no mortgage and everything else remains the same on your 2006 taxes. I bet you would be better off to pay off your mortgage as quickly as possible. You will save money by not paying all of that potential interest.

Answer 8

If you paid off half of your mortgage, you already paid about 70% of the interest. I would just put away the $2000.00. You can always decide later what to do with the money.

Answer 9

I know you think it would be a good idea to pay off your loan,even in one lump sum, but it is not. In fact it will only hurt you now and down the road. It sends a RED FLAG to everyone including your bank that you foresee trouble in the future and may cause the bank to require penalties (early payoff, future interest owed,tax penalties,etc) to be added on to what you think is your last payment. It also is not good for your credit because it shows you are unable to go the distance when you have a loan so your chances down the road for getting any type of loan may be jeopardized. Another fact may be that Bank Of America does not own the loan (they make more money selling your loan instead of keeping it) so the mortgage company you may think you are dealing with isn't. Even if you were to ask who has your loan, you may be surprised that no one knows because it has been sold over and over again. If you pay it off to one company, chances are that is not the correct one so the actual lender may tell you they want the loan paid off in a balloon payment and then you won't have the money..............or any recourse to get your money back!

Answer 10

do you have any other debt? Cars or other loans? If it was me, I would do the dave ramsey plan. I would have a quick emergency fund of at least $1000.00. Then start paying off debts, smallest to largest, paying extra on the smallest, and minimums on the larger ones. Then do a full emergency fund of 3 to 6 months worth of expenses. I think dave then says next should be the house, but it may be retirement or the kids education.

Pick up his book Total Money Makeover, if you haven't already. Great book.

Answer 11

I am a big fan of maxing out the 401k first. Not only do you save money, but you do get a nice tax advantage. Whatever you do, be sure to invest enough in the 401k to take full advantage of the employer matching funds. This is free money, you should go get it!