Dreams of a great retirement fuel the investment strategies of many. For those who also are paying a home mortgage, the question often arises whether it would better to take some extra income and apply it towards paying off the home or increasing the retirement funds. The financial mortgage advice seems to be as confusing and wide-spread as the questions themselves.
Many professional financial advisers suggest that it is better to fund the retirement while continuing the minimum mortgage payments. Some others suggest that the retirement should be kept at minimum amounts and the home loan should be paid off quickly.
Let’s look at both sides of the arguments for someone who has an extra $500 a month to go towards one of these options.
Increase the Retirement Funds
On the surface, this seems to be a pretty obvious choice. If you increase the money in your retirement accounts, then you will be able to spend your retirement years actually being retired rather than working full time just to keep the lights on. There are tax savings involved as well, the money you are paying on your retirement each year is often not taxable, and the money you are paying towards your mortgage is tax-deductible if you itemize. A win-win!
Pay Down the Mortgage
Dave Ramsey teaches his listeners to always pay down the mortgage first. This is a good strategy in many situations, especially if you are young and plan to stay in your home for a very long time. The average American, though, only stays in a home for 7 years. Paying down the home loan in the situation where you will simply be trading it off for another mortgage may not be the smartest investment.
Paying off a mortgage has its advantages. If you could manage to pay off a 30 year home loan in 10 years, you would potentially save hundreds of thousands of dollars. If you are young enough, your investments will be caught up later, because that $1000 a month in payments, plus the extra $500 a month, will be freed up to apply 100% towards savings.
By paying off your mortgage early, you also reduce your risk. Everyone knows all too well how easy it is for a job to be lost and payments to be missed resulting in foreclosure of your home and a loss of 100% of the money invested in it. A paid-off-home cannot be foreclosed upon no matter how your job is going. There is comfort in that security, there is no denying it. But housing prices are unstable right now. This is a very good strategy if you purchased a home for much less than its current value, but not so wise if it’s the other way around.
Perhaps the wisest choice for the average homeowner would be to split that extra income between both sources. Paying the mortgage off faster with $250 extra per month and paying an extra $250 per month towards your retirement will split the benefits of both options.
Very few American homeowners are in the ideal situation to pay off their home loan early and still catch up with their retirement plans, so each situation should be looked at individually. What is ideal? Purchasing a home for less than it’s worth when you are in your early 20’s, paying it off in 7 to 10 years when you are about 30 years old, staying in that home up to or through retirement, and investing more than 100% of your previous payments in retirement and other investments over the course of those 30 or 40 years. But how many of us can turn back the clock and make that happen?
More resources to help you make this decision:
The following links are Amazon affiliate links.
How to Own Your Home Years Sooner & Retire Debt Free
How to Save Thousands of Dollars on Your Home Mortgage
How to Make Your Money Last: The Indispensable Retirement Guide
How to Retire Happy, Wild, and Free: Retirement Wisdom That You Won’t Get from Your Financial Adviser
Investing For Dummies – The easy way to invest in your financial future
Investing For Beginners: How To Start Small, Grow Your Money And Build Your Wealth Today!