Money magazine lists six money dilemmas and what to do about them. Over the next few days, I'll list each dilemma, what Money suggests as the best option, my take on the issue, and additional FMF posts on the topic. Here goes:
Dilemma #4: Prepay Your Mortgage OR Invest
Money's suggestion: Investing wins.
My take: I have a mixed response on this one, but for the most part, I'm going against the flow.
I would first fully refund my retirement plans (for me it was my 401k) and THEN I would pay off debt. I know that Money recommends investing that second portion as well, but we simply wanted to be rid of the debt and owe nothing to anyone. Could we have made more money with another option. Probably. Did we rest better at night knowing we didn't owe anyone anything? Certainly. Have we done well financially as a result of our plan. Yep, our net worth has continued to grow dramatically throughout the years.
FMF posts related to this topic: Paying Off a Mortgage Versus Investing, My Formula for Buying a House
Interesting. That is exactly what Dave Ramsey says too. I know I will feel much better when our house is fully paid off.
Posted by: Debbie | January 02, 2008 at 09:15 AM
I am solidly in the invest camp.
With the interest rate on my mortgage now down to 3.9% :-) and a sufficently long time horizon to work with and with inflation nudging above 3% (making the real cost of the mortgage negligable), the case for investing instead of repaying the mortgage is pretty compelling.
Sure, paying off the mortgage is risk free and investing carries risk. I can live with the risk as the time horizon is long enough to ride out any down years.
Posted by: traineeinvestor | January 02, 2008 at 09:42 AM
As traineeinvestor mentioned, a big factor in this equation is the interest rate. If you are at 3.9% like he/she is, investing is probably the way to go as you can currently earn 5% on some savings accounts. But if you are paying 6% plus, it might be better to prepay the mortgage.
Personally, we were in the prepay camp for about 18 months, but recently have just started putting the extra money into a savings account to increase our liquidity and save for the downpayment on the next home.
Posted by: Kevin | January 02, 2008 at 09:47 AM
As traineeinvestor mentioned, a big factor in this equation is the interest rate. If you are at 3.9% like he/she is, investing is probably the way to go as you can currently earn 5% on some savings accounts. But if you are paying 6% plus, it might be better to prepay the mortgage.
Personally, we were in the prepay camp for about 18 months, but recently have just started putting the extra money into a savings account to increase our liquidity and save for the downpayment on the next home.
Posted by: Kevin | January 02, 2008 at 09:53 AM
FMF - when a comment is posted, it is not bringing you back to the current page like it used to. I am getting stuck on a "typepad" page that is completely blank.
Posted by: Kevin | January 02, 2008 at 10:00 AM
Kevin --
Typepad is currently having some problems (I'm having trouble posting, etc.), so your problem is probably part of the issue. I don't think they "get in" until Pacific Time, so we'll have to wait this one out.
Posted by: FMF | January 02, 2008 at 10:20 AM
I'm like you, I want to get the mortgage paid off. Sure investing is probably better in terms of dollar and cents since we have a fairly low interest rate but we want the mortgage to be paid off before we retire.
Posted by: GeckoGirl | January 02, 2008 at 10:32 AM
Not a dilemma. Take option 3 - rent and invest, then pay cash later.
Posted by: Early Retirement Extreme | January 02, 2008 at 12:50 PM
I much prefer the liquidity. Once you put money into a mortgage payment it's extremely hard to get back out.
Posted by: justin | January 02, 2008 at 02:15 PM
I'm all for sleeping better at night with no debt (including mortgage) than making a few percent more in the stock market. That said, we are paying off the mortgage AND investing because you don't want all your eggs in one basket. Also if you get laid off, it's harder to refinance your house to get some money than it is to sell some stocks.
Posted by: Stormy | January 02, 2008 at 03:04 PM
I'm with you, FMF. (Pay off all debt, including mortgage, as quick as possible.) I can't wait for the day of liberation from my $199k mortgage, which should come before my wife and I turn 40 in 6 years.
Posted by: FS | January 02, 2008 at 03:10 PM
Investing is the way to go if you have a low rate, high taxes, and a steady income. If not, pay off the debt.
Posted by: Lord | January 02, 2008 at 04:09 PM
Some of the smartest investors leverage the hell out of their homes to them prepaying doesn't make any sense.
Posted by: Denver | January 02, 2008 at 06:02 PM
There are numerous intangible or "priceless" benefits to paying off a mortgage. Paying off a home is a huge accomplishment - you will gain confidence.
Having said that, I would caution against it until a couple of key factors were met, first 1) mortgage interest rate exceeds return on T-Bonds and 2) retirement accounts are fully funded.
Posted by: kris | January 02, 2008 at 09:34 PM
Denver --
1. Yes, some people do well leveraging their homes.
2. Some others don't do so well.
3. I note that you're a mortgage lender, so maybe you're not completely unbiased. ;-)
Posted by: FMF | January 03, 2008 at 08:00 AM
If you have an ARM (you poor fool), get out of it. Now. If you have to add equity to do so, do it. Just get the hell out ASAP.
But if your mortgage is fixed at current-or-recent rates, I say you'd be a fool to prepay. Prepaying a long-term fixed-rate debt is the same thing as betting that interest rates are going to fall. With the SS trust fund on the very brink of collapsing and taking the government's loose-money policy down with it, that's a sucker bet. In a few years, the money that you save today will be earning you more interest than you'll be paying out on the mortgage...in other words your mortgage will basically pay ITSELF off, just out of the interest differential, and once the payoff is complete, all the income will be yours to spend. But if you use the money to prepay today, you'll have less of a mortgage payment, but you'll be foresaking the investment income.
The banks are going to be taking a bath on fixed-rate mortgages in a few years. And when the banks lose, we win.
Posted by: Matt | January 10, 2008 at 12:02 PM
As traineeinvestor mentioned, a big factor in this equation is the interest rate. If you are at 3.9% like he/she is, investing is probably the way to go as you can currently earn 5% on some savings accounts. But if you are paying 6% plus, it might be better to prepay the mortgage.
Personally, we were in the prepay camp for about 18 months, but recently have just started putting the extra money into a savings account to increase our liquidity and save for the downpayment on the next home.
Posted by: byoh | May 20, 2010 at 06:34 PM