Should You Pay Off Your Mortgage Or Invest In Your 401(K)?

mortgagecalculator

We’re talking about mortgages again. I promise you that I am not beating a dead horse but since this is the most expensive thing that most of us will every pay for, and since so many people are defaulting, I can’t help but covering this topic from many different angles.

I wrote a post called, 30 Year Mortgages Are For Suckers which ruffled a bit of feathers. Some of you agreed and some disagreed, but I want to back my argument up with the viewpoints of some financial gurus as well.

According to Suze Orman,

“If you are 45 to 50 years of age and are going to stay in your house for the rest of your life, and you have a mortgage payment, I will forever say that one of the best things that you can do with extra money is pay down your mortgage. Why? You have to generate that money somehow to pay off that mortgage. It’s far easier to pay it off now than later.”

Dave Ramsey says that,

“It is a great thing to have a paid for house.  We have done in depth research and we have discovered that 100% of foreclosures have occurred on folks with mortgages.  If you’ve finished saving 6 months of emergency money and paying off your credit card debts, any other money above what you save for the kids’ college and 15% of your income going to retirement should be dumped into the mortgage.   You want to pay off the mortgage as fast as possible.  As soon as you pay off your mortgage, take off your shoes, walk through your back yard.  The grass feels different.”

You know why? Because it’s YOUR grass now. No one can come yank it away from you.  That is, unless Bank of America comes by and mistakenly forecloses on a home that they don’t own. Again.  It doesn’t matter if your home’s value goes up or down because you plan on staying there for a long time – possibly ’til death do you part.

Let’s work on some math with this scenario.  Let’s say that you have a $200,000 mortgage at 6% for 30-year fixed and your payments are $1,200 a month.  How much money do you have to have in a 401(K) to generate $1,200 a month after taxes? $1,200 a month is $14,400 a year. You need approximately $400,000 in a 401(k) at 5% generating $20,000 a year that you pay taxes on to pay off your mortgage.

So you’re probably asking why not just take the money and put it into the stock market and get some interest on your money.  Sure, the stock market is soaring right now, but do you remember that horrible period in 2008 and 2009 when the stock market tanked?  I lost a little over 30% of my 401(K) balance.  How did your portfolio do during that time? How much risk can you stand?  Paying off your mortgage faster absolutely guarantees that you will save money on the total interest paid on your mortgage in the long run.

What about the mortgage tax deduction write-off?  The average homeowner keeps a home for seven years.  During the first bunch of years that you are paying your mortgage, much of the interest is front loaded.  That’s the pretty little chart shown below.  If we continue with our $200,000 home scenario from above, in the first year out of $14,389 in payments, about $11,933 of that is interest.  That’s a lot of money spent. The longer you extend the mortgage the worse it works against you.  After 20 years of paying on that mortgage you will you still owe almost $100,000.  How much is that tax deduction worth to you now?

The yellow is interest, the orange principal, the pink line the balance.

So let’s go back to our original loan where the monthly payment is $1,200, and you decide that you want to send in an extra $100 every month.  You’ll take a 30 year mortgage where you would have paid over $431,000 in principal and interest down to 25 years and you would have paid a little over $382,000.   That’s a saving of almost $50,000 and 5 years of payments with no refinancing required!

So back to the original question again.  Do I max out the 401(K) first or do I prepay the mortgage first?  I would plan on paying off my mortgage.  If I pay off my mortgage, I won’t need to save as much in my 401(K) because that huge monthly bill will no longer exist.  If push comes to shove and I’m in dire need of cash in my retirement, I would consider a reverse mortgage, renting a room in the home or selling the house.  You will have options available to you!

Yes, 30 year mortgages are still for suckers if you plan on dragging it out for that long.  If you are prepaying, I love you for it.  Should you invest in your 401(k) or prepay the mortgage?  I’m not telling you to NOT invest in your 401(K). I would put the minimum amount required to get the maximum employer match from my company.  Then I would advise you to pay down as much as possible on your mortgage whenever you find yourself with extra money.

You can learn more about how those extra payments add up with my primer on the biweekly mortgage.

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57 Responses to Should You Pay Off Your Mortgage Or Invest In Your 401(K)?

  1. I’m going to disagree and say that investing in 401k is much more effective than paying down mortgages.
    In 2040, that $1,200 will feel like $300 due to inflation. If the employer matches 401k contribution, you just can’t pass that up. That’s over 100% gain with no work at all (including the tax saving.)
    I vote for 401k. :)
    Once you max out 401k, then pay down the mortgage loan.

  2. I’m going to disagree and say that investing in 401k is much more effective than paying down mortgages.
    In 2040, that $1,200 will feel like $300 due to inflation. If the employer matches 401k contribution, you just can’t pass that up. That’s over 100% gain with no work at all (including the tax saving.)
    I vote for 401k. :)
    Once you max out 401k, then pay down the mortgage loan.

    • Sandy says:

      We don’t disagree too much! You still say to add extra to the mortgage. You just prefer to max out the 401(K) first.

  3. Justin says:

    Yes I have to agree with Retirebyforty… invest in your 401k!!! Inflation makes a huge huge huge difference… its going to be a much smaller payment years down the road when you adjust for inflation. Rates are also nowhere near 6% right now, though I can understand that many people are locked in at a rate that high.

    Also, the monthly payment figure you use considers both principal and interest… when you are talking about yoru ROI in your 401k, you really can only consider the interest portion you pay on your mortgage, which is not the $1200 monthly payment, but rather a portion of it.

    And lets not forget about the tax advantage you receive on mortgage interest as well, and how much that can increase when you lower your AGI by investing more in your 401k….the tax benefits cannot be touched!

    That being said, Ill be quite happy when my house is paid off…in 29 more years :)

    • Sandy says:

      Now, now kids. I didn’t say to NOT invest in the 401(K). I think that if you have extra money to shove it over to the mortgage. Even $20 every month makes a difference and can wipe a few months off your 29 years. ;)

  4. Justin says:

    Yes I have to agree with Retirebyforty… invest in your 401k!!! Inflation makes a huge huge huge difference… its going to be a much smaller payment years down the road when you adjust for inflation. Rates are also nowhere near 6% right now, though I can understand that many people are locked in at a rate that high.

    Also, the monthly payment figure you use considers both principal and interest… when you are talking about yoru ROI in your 401k, you really can only consider the interest portion you pay on your mortgage, which is not the $1200 monthly payment, but rather a portion of it.

    And lets not forget about the tax advantage you receive on mortgage interest as well, and how much that can increase when you lower your AGI by investing more in your 401k….the tax benefits cannot be touched!

    That being said, Ill be quite happy when my house is paid off…in 29 more years :)

    • Sandy says:

      Now, now kids. I didn’t say to NOT invest in the 401(K). I think that if you have extra money to shove it over to the mortgage. Even $20 every month makes a difference and can wipe a few months off your 29 years. ;)

  5. krantcents says:

    I am fortunate to max out my 403B (401K) IRA and Roth IRA. I have a 15 year mortgage at 5% and have 7 years left till it is paid off. My mortgage payment is roughly one third of the market rent. My net mortgage (tax effect) is around 4%, I feel motivated to invest vs pay my mortgage, because I will average more than that in the market. I will retire in 6 years, so I am adjusting my payment to coincide. If I weren’t retiring, I would not pay it off early.

    • Sandy says:

      You’re pretty close to retirement and should be socking away as much as possible in all retirement funds that you can get your hands on. If you’re not 59 1/2 when you retire though make sure that you have income that you can touch without penalties. I’m happy that you won’t be someone paying a mortgage in retirement.

  6. krantcents says:

    I am fortunate to max out my 403B (401K) IRA and Roth IRA. I have a 15 year mortgage at 5% and have 7 years left till it is paid off. My mortgage payment is roughly one third of the market rent. My net mortgage (tax effect) is around 4%, I feel motivated to invest vs pay my mortgage, because I will average more than that in the market. I will retire in 6 years, so I am adjusting my payment to coincide. If I weren’t retiring, I would not pay it off early.

    • Sandy says:

      You’re pretty close to retirement and should be socking away as much as possible in all retirement funds that you can get your hands on. If you’re not 59 1/2 when you retire though make sure that you have income that you can touch without penalties. I’m happy that you won’t be someone paying a mortgage in retirement.

  7. Justin says:

    @Krantcents… I have to agree with you as well, my net mortgage rate is probably about 4%… and consider the dividend payments on companies like ADP, the percentage is nearly equal to the 4% I pay towards the mortgage in interest…and then they increase their dividend every single year…this will beat inflation, or at the very least not get beat up by it. Then you have the actual prices gains from the stock, which is 10% this year alone.

    • Sandy says:

      This is a decent year for returns where stocks are concerned, but how much more can the market grow? True, disasters like the tsunami and high gas prices will make some deals available for those consistently investing with dollar cost averaging in mind, but if you gained nothing on your money in the last decade like I did (my employer did not contribute) what then? While the average value of my portfolio has rebounded, when inflation is factored in I’ve gained nothing.

  8. Justin says:

    @Krantcents… I have to agree with you as well, my net mortgage rate is probably about 4%… and consider the dividend payments on companies like ADP, the percentage is nearly equal to the 4% I pay towards the mortgage in interest…and then they increase their dividend every single year…this will beat inflation, or at the very least not get beat up by it. Then you have the actual prices gains from the stock, which is 10% this year alone.

    • Sandy says:

      This is a decent year for returns where stocks are concerned, but how much more can the market grow? True, disasters like the tsunami and high gas prices will make some deals available for those consistently investing with dollar cost averaging in mind, but if you gained nothing on your money in the last decade like I did (my employer did not contribute) what then? While the average value of my portfolio has rebounded, when inflation is factored in I’ve gained nothing.

  9. 101 Centavos says:

    It depends on personal strategy. For us, paying down the primary mortgage wouldn’t make sense. Although we re-financed with a 30 for cash flow reasons, we don’t plan on staying in this house past when the boys move out. So in less than 8 years, this house will go on the market, and we move to our little second house in the country, which is paid for.

  10. 101 Centavos says:

    It depends on personal strategy. For us, paying down the primary mortgage wouldn’t make sense. Although we re-financed with a 30 for cash flow reasons, we don’t plan on staying in this house past when the boys move out. So in less than 8 years, this house will go on the market, and we move to our little second house in the country, which is paid for.

  11. The thing about mortgages is they’re often so big, it’s difficult to even invest in a 401(k). If your employer offers a match, of even 25% of contributions, you don’t wanna pass that up. If you’re afraid about the market, you can always just put the money in a cash or treasury fund within the 401(k).

    I love the idea of a paid for house. You actually can lose it if you’re successfully sued for enough money. Which is why a good umbrella insurance policy may be a worthwhile purchase. (Not that you shouldn’t pay off your mortgage. Just wanted to point that out).

    I’m rambling, but what I really want to say is:
    Paid For House = Very Good Thing

    I’d say work on paying off your mortgage before saving for kid’s college, but then again, I’m childless at the moment. Oh, and I don’t have a mortgage. I’m happily renting and saving/investing the difference.

    • Sandy says:

      Depending on what you’re sued for your primary housing is usually protected, but as you mention, a good umbrella policy will take care of that.

  12. The thing about mortgages is they’re often so big, it’s difficult to even invest in a 401(k). If your employer offers a match, of even 25% of contributions, you don’t wanna pass that up. If you’re afraid about the market, you can always just put the money in a cash or treasury fund within the 401(k).

    I love the idea of a paid for house. You actually can lose it if you’re successfully sued for enough money. Which is why a good umbrella insurance policy may be a worthwhile purchase. (Not that you shouldn’t pay off your mortgage. Just wanted to point that out).

    I’m rambling, but what I really want to say is:
    Paid For House = Very Good Thing

    I’d say work on paying off your mortgage before saving for kid’s college, but then again, I’m childless at the moment. Oh, and I don’t have a mortgage. I’m happily renting and saving/investing the difference.

  13. I have about 8 years left on my mortgage and I’m paying that sucker off A.S.A.P.

    • Sandy says:

      Yaay for paying of that mortgage. When you send in the last payment have a large glass of wine and do a happy dance!

  14. I have about 8 years left on my mortgage and I’m paying that sucker off A.S.A.P.

    • Sandy says:

      Yaay for paying of that mortgage. When you send in the last payment have a large glass of wine and do a happy dance!

  15. Christa says:

    I worked in mortgage for a while, and I can attest that paying a few hundred extra per month cuts off at least tens of thousands of dollars in repayment, if not more, and decreases your repayment time. For me, that’s a win-win.
    I went with the suggested 30 year mortgage in purchasing the home, but when refinancing (to save more than 1% in interest), I went with a 15 year — and will now save over $45,000 in interest. And that’s on a relatively small mortgage!
    I definitely think that funding the 401(k) and paying off high interest debts first is important, but I also believe people should put as much extra money toward that mortgage as possible.

    • Sandy says:

      See! Advice from an industry professional. Thank you Christa. Paying off that mortgage saves thousands in interest. It just burns me to pay that much.

  16. I say do both, max out the 401K always first, and then pay any comfortable extra money to the mortgage.

    Cheers, Sam

    • Sandy says:

      Hey, don’t try to be a diplomat! You’re messing up the rotation.

    • lili says:

      yes, if people have enough money, everybody like to do it. but how about you cannot do both of them? I think Pay off mortgage should be the my priority.

  17. I say do both, max out the 401K always first, and then pay any comfortable extra money to the mortgage.

    Cheers, Sam

    • lili says:

      yes, if people have enough money, everybody like to do it. but how about you cannot do both of them? I think Pay off mortgage should be the my priority.

  18. I’m in the payoff my home early camp myself but not at the expense of 401K.

    Where I live, housing is cheap (my mom’s mortgage is just over $600/mo), so it’s not too hard to pay extra.

    I know I may not always be lucky enough to have a job in such a cheap area, so the home equity I have is kind of like my next house fund. My current home value is about 1/3 or 1/4 of what housing would be closer to a city, so building equity is my way of having at least 20% down towards the next place.

    • Sandy says:

      You cna always trade up when you have enough equity. I know plenty of people that do that. I plan on doing the same myself since there is no way in hell that I could afford a home in New York otherwise.

  19. I’m in the payoff my home early camp myself but not at the expense of 401K.

    Where I live, housing is cheap (my mom’s mortgage is just over $600/mo), so it’s not too hard to pay extra.

    I know I may not always be lucky enough to have a job in such a cheap area, so the home equity I have is kind of like my next house fund. My current home value is about 1/3 or 1/4 of what housing would be closer to a city, so building equity is my way of having at least 20% down towards the next place.

    • Sandy says:

      You cna always trade up when you have enough equity. I know plenty of people that do that. I plan on doing the same myself since there is no way in hell that I could afford a home in New York otherwise.

  20. John says:

    It’s impossible to put a price on the peace of mind of paying off a mortgage, and a home is much more than an investment. You can’t live in a 401k or IRA.

    However, if an employer matches a 401k contribution than that would be very difficult to pass up. My list for prioritizing excess income is…

    1. pay off credit cards
    2. Establish 6 month rainy day-fund
    3. Max out 401k contributions up to employer match
    4. Pay extra on the mortgage

  21. Little House says:

    I like the option to do both; pay a little extra towards the mortgage so it doesn’t take 30 years and still invest a little extra into the 401(k). Having no mortgage payment in retirement is great, but you will still have taxes and insurance. I think that the biggest expense in retirement isn’t housing as much as medical care.

    • GaryS says:

      Aw, Little House, the federal government will take care of your expenses in your aged years. (Sorry, I’m sarcastic by nature and mean no offense.)

      My situation is thus: Bank of America has my mortgage. They’ve just been downgraded by Moody’s. BOA has stated that if they fail they will call in all their billions of dollars of loans. I also have a large sum of cash in my BOA money market account (just received from inheritance). I’m planning on putting most of the money towards my mortgage. It won’t pay it off, but it’ll pay 2/3 of it. I’ve been paying on the (30 year) mortgage for about 5 years. We put money down, sunk money into the upkeep and betterment of the house, so we’re already majorly invested.

      I have a 401k but it’s not huge. With the whipsawing markets and triple digit losses, I’ve even considered taking enough money from the 401k to finish off the mortgage. At some point, more banks will fail. Currency inflation could well turn tens of thousands of dollars into little more than a pittance. Yes, it can happen in America. Heck, it’s already happening! Priced milk and bread lately? I remember $.75/gallon gass, and you cannot convince me the price is all about scarcity. Young people have no idea you used to able to feed a carload at the drivethrough, pay with a fiver and get change back. I remember those days.

      I want to pay off my house, hunker down, save every scrapping dime, put away some more silver coins, keep my house in top shape. My cars and credit cards are all paid off. My mortgage is my only debt left to handle and it’s well below 6 figures. My bottom line? It fits in with Little House’s comment: KEEP YOURSELVES HEALTHY! Take care of our bodies. I plan on working all the way to the grave.

      • Sandy says:

        Gary,

        I’ll be working right next to you! That’s why getting rid of all of my debt including the mortgage and student loans, which people tend to be comfortable having, is important to me.

  22. The Condor says:

    Pay home up front pay half. Pay 401k along the way get double. Inflation just irons out across stocks and homes but its more important not to lose a home. IMHO Its more risky to have your home “on the table”. Personally as a single guy Im saving for 50% down on a house like crazy and declined the 401k. Luckily I am good with not spending. (i.e.: quit drinking, got rid of cable replaced with Roku, cash car, moved to 2 miles from work) Put that down once I have it then get room mates to pay the note and saving for another rental. Eventually I will be rich! High five! The power of positive thinking! :)

    • Sandy says:

      It’s good to save for a home, but what happens when you have a home and no retirement savings? Would you sell your home?

  23. The Condor says:

    Pay home up front pay half. Pay 401k along the way get double. Inflation just irons out across stocks and homes but its more important not to lose a home. IMHO Its more risky to have your home “on the table”. Personally as a single guy Im saving for 50% down on a house like crazy and declined the 401k. Luckily I am good with not spending. (i.e.: quit drinking, got rid of cable replaced with Roku, cash car, moved to 2 miles from work) Put that down once I have it then get room mates to pay the note and saving for another rental. Eventually I will be rich! High five! The power of positive thinking! :)

  24. Scott Neumann says:

    OK. Nice thread. I get it. Everyone must prioritize and each ones priorities are slightly different; however, it seems like the general consensus is:

    1- save for 6 month emergency fund
    2- pay off credit card debt (higher interest debt gets paid off first)
    3- invest the maximum your company will match in your 401k
    4- all extra goes toward your primary home mortgage

    This is great stuff, but with interest rates so low, if I can borrow money for 4% and make 6% by investing that money elsewhere, why wouldn’t I just borrow as much money as I could? Isn’t this practically free money? Don’t get me wrong, I don’t disagree with anyone that says paying off their primary mortgage is a good thing, I just question if this is the best thing to do with all that extra money.

    Now lets say I were talking about investment property. Would you approach investment property the same way as your primary residence. In other words, would you recommend paying your mortgage off as quickly as possible to avoid all those interest payments on your investment property or should you simply let your renters pay the mortgage and apply any positive cash flow to a retirement fund?

    If you have read this far I appreciate it and want you to know I have more questions than advice, so please respond back.

    • Sandy says:

      I read the entire thing and here’s my take:

      With the cost of borrowing this low, sure, it makes perfect mathematical sense to borrow as much as possible, if you can capture a higher return than the rate at which you borrow. My only problem with this is that while you and I might do so, the average person isn’t as, lets say, disciplined enough to ensure that their returns outpace their costs. Plus, you also get into things like job stability, globalization leading to unstable markets, blah, blah, blah. But, do what works for you!

      Now, as an owner of three rental units, I actually borrowed from my 401K (low interest) to buy my homes and use the rental money to pay the loans. I’m in the process of converting one loan into a home equity line as a way of backing into a mortgage. My rate is good, my tenant gets to pay the mortgage for me, and I get to deduct the costs of the mortgage. Win-win situation for me. My original amount goes back to my 401K plus interest and it frees the money up as capital to fund something else and back into another mortgage.

      But that’s me. As I always caution, you have to do what makes sense to you!

      • Scott says:

        Great response! I actually have 3 rental properties as well and allow the renters to pay the mortgage; however, I have recently started to take advantage of some changes the government has made which makes it much easier to refinance investment property especially in a situation where your loan to value is not too good. If I were to refinance my investment homes, instead of having just enough money to cover the costs of owning the home, I would have about $200 extra every month on one of the properties, $150 on another, and $100 on the third. My dilemma (a good dilemma) has been what to do with the extra money. I felt my options were this:

        1- pay the extra directly to the principal of the new loan and end up paying the new loan off sooner than the original loan I had.
        2- take the extra money and invest it in a retirement fund, following the advice of many financial gurus to “pay yourself first”.

        I had a thought last night that may throw all of this logical reasoning off though. What if I lost my job or heaven forbid became disabled and could not work? I could lose all of the assets I have been paying for unless I have paid all of the debt owed on them. In this case, I suppose it would make more sense to pay off all of my debt including mortgage debt as soon as possible while I am still able to do so. Any thoughts on this?

        • Sandy says:

          Personally, I’ve struggled with this as well. And here are my actual numbers:

          Total monthly mortgage costs: $930. Total rental income $1,175. This rises to $1,750 in another month. I am paying $1,000 to my mortgages right now, putting the balance to utilities. Once the other rental unit comes on board next month I’ll use that income to pay the taxes and such.

          My goal is to pay off the homes within 5 years. I have 2 years left on one and about 4 years left on the other. My situation is a little different because I plan on quitting my job in 5 years to work for myself and I don’t want to carry a mortgage at that time. I want whatever income is generated from my homes to be unencumbered by any debt.

          At the same time, I’m socking away as much as possible to my 401K while paying off my personal debt. I want to be completely debt free within those 5 years. So, my approach is multi-pronged, but, I have a very aggressive short-term goal.

          If I lose my job before then, I will be able to live on a much smaller salary because I will have much less debt, and the income generated from my homes will go straight to my pocket and not to debt servicing. I can probably live the same quality of life on less income, AND I have the added ability to having my homes generate income well into my retirement, if I so choose.

          I plan on being like this guy because I’m doing it this way.

          So, what do you do with your money? Good question! Split the difference! Save half and use half to pay down your debt faster. That’s what I do when I can’t decide.

  25. como651 says:

    This is question can be answered mathematically. The 10 year benchmark using the Morningstar US markets index is 6.08%. The average annual gross operating expense of the average mutual fund is around .75%. Therefore, if your mortgage interest rate is 5.33% or more then you are mathematically better off paying off your mortgage but only after you have contributed to your 401K up to your employers match since that is a guaranteed return on investment usually of 50% or 100% up to the maximum matching amount. On the other hand you can leverage your money by tax deferring dollars to your 401K which you can’t do by making additional mortgage payments with after taxed dollars. However, you must weigh the odds of a stock market collapse and higher taxes by the time you are forced to take your 401K distributions. Paying off your mortgage is the safe bet in my opinion but you have potential for higher yields investing in stock market based on historical data. I personally feel the added risk of stock market investing is not worth it given the market volatility, poor current financial market regulation, and an out of control national debt which will lead to higher tax rates eventually.

  26. Jonathan Singleton says:

    Your 401k is sheltered from lawsuits to a large degree. The bank will gladly seize your house if you can’t make the payment even if you almost have it paid for. 401k money is more likely to be invested for the long haul. A house could be sold, or borrowed against and the funds spent. Mortgage rates are low and after figuring tax savings and inflation, the interest is almost free. I would pay off my house with a windfall all at once. As far as monthly investing, I’m leaning more toward the 401k and an emergency fund.

  27. Jonathan Singleton says:

    Your 401k is sheltered from lawsuits to a large degree. The bank will gladly seize your house if you can’t make the payment even if you almost have it paid for. 401k money is more likely to be invested for the long haul. A house could be sold, or borrowed against and the funds spent. Mortgage rates are low and after figuring tax savings and inflation, the interest is almost free. I would pay off my house with a windfall all at once. As far as monthly investing, I’m leaning more toward the 401k and an emergency fund.

  28. Will says:

    I think it’s has all been said but:

    1.) Tax benefits of mortgage interest deduction and 401k contributions

    2.) The housing market has proven to be able to be just as volatile as the stock market.

    3.) Don’t underestimate that time frame where you lost 30% in your 401k. Many people forget that if you were a prudent investor during that time and continued to buy, that the principle of dollar cost averaging will benefit you well in the future. Learn to love the lows of the market if you have enough time to ride it out.

  29. Sandy says:

    See! Advice from an industry professional. Thank you Christa. Paying off that mortgage saves thousands in interest. It just burns me to pay that much.

  30. GaryS says:

    Aw, Little House, the federal government will take care of your expenses in your aged years. (Sorry, I’m sarcastic by nature and mean no offense.)

    My situation is thus: Bank of America has my mortgage. They’ve just been downgraded by Moody’s. BOA has stated that if they fail they will call in all their billions of dollars of loans. I also have a large sum of cash in my BOA money market account (just received from inheritance). I’m planning on putting most of the money towards my mortgage. It won’t pay it off, but it’ll pay 2/3 of it. I’ve been paying on the (30 year) mortgage for about 5 years. We put money down, sunk money into the upkeep and betterment of the house, so we’re already majorly invested.

    I have a 401k but it’s not huge. With the whipsawing markets and triple digit losses, I’ve even considered taking enough money from the 401k to finish off the mortgage. At some point, more banks will fail. Currency inflation could well turn tens of thousands of dollars into little more than a pittance. Yes, it can happen in America. Heck, it’s already happening! Priced milk and bread lately? I remember $.75/gallon gass, and you cannot convince me the price is all about scarcity. Young people have no idea you used to able to feed a carload at the drivethrough, pay with a fiver and get change back. I remember those days.

    I want to pay off my house, hunker down, save every scrapping dime, put away some more silver coins, keep my house in top shape. My cars and credit cards are all paid off. My mortgage is my only debt left to handle and it’s well below 6 figures. My bottom line? It fits in with Little House’s comment: KEEP YOURSELVES HEALTHY! Take care of our bodies. I plan on working all the way to the grave.

  31. Sandy says:

    Gary,

    I’ll be working right next to you! That’s why getting rid of all of my debt including the mortgage and student loans, which people tend to be comfortable having, is important to me.

  32. Sandy says:

    I read the entire thing and here’s my take:

    With the cost of borrowing this low, sure, it makes perfect mathematical sense to borrow as much as possible, if you can capture a higher return than the rate at which you borrow. My only problem with this is that while you and I might do so, the average person isn’t as, lets say, disciplined enough to ensure that their returns outpace their costs. Plus, you also get into things like job stability, globalization leading to unstable markets, blah, blah, blah. But, do what works for you!

    Now, as an owner of three rental units, I actually borrowed from my 401K (low interest) to buy my homes and use the rental money to pay the loans. I’m in the process of converting one loan into a home equity line as a way of backing into a mortgage. My rate is good, my tenant gets to pay the mortgage for me, and I get to deduct the costs of the mortgage. Win-win situation for me. My original amount goes back to my 401K plus interest and it frees the money up as capital to fund something else and back into another mortgage.

    But that’s me. As I always caution, you have to do what makes sense to you!

  33. Scott says:

    Great response! I actually have 3 rental properties as well and allow the renters to pay the mortgage; however, I have recently started to take advantage of some changes the government has made which makes it much easier to refinance investment property especially in a situation where your loan to value is not too good. If I were to refinance my investment homes, instead of having just enough money to cover the costs of owning the home, I would have about $200 extra every month on one of the properties, $150 on another, and $100 on the third. My dilemma (a good dilemma) has been what to do with the extra money. I felt my options were this:

    1- pay the extra directly to the principal of the new loan and end up paying the new loan off sooner than the original loan I had.
    2- take the extra money and invest it in a retirement fund, following the advice of many financial gurus to “pay yourself first”.

    I had a thought last night that may throw all of this logical reasoning off though. What if I lost my job or heaven forbid became disabled and could not work? I could lose all of the assets I have been paying for unless I have paid all of the debt owed on them. In this case, I suppose it would make more sense to pay off all of my debt including mortgage debt as soon as possible while I am still able to do so. Any thoughts on this?

  34. Sandy says:

    Personally, I’ve struggled with this as well. And here are my actual numbers:

    Total monthly mortgage costs: $930. Total rental income $1,175. This rises to $1,750 in another month. I am paying $1,000 to my mortgages right now, putting the balance to utilities. Once the other rental unit comes on board next month I’ll use that income to pay the taxes and such.

    My goal is to pay off the homes within 5 years. I have 2 years left on one and about 4 years left on the other. My situation is a little different because I plan on quitting my job in 5 years to work for myself and I don’t want to carry a mortgage at that time. I want whatever income is generated from my homes to be unencumbered by any debt.

    At the same time, I’m socking away as much as possible to my 401K while paying off my personal debt. I want to be completely debt free within those 5 years. So, my approach is multi-pronged, but, I have a very aggressive short-term goal.

    If I lose my job before then, I will be able to live on a much smaller salary because I will have much less debt, and the income generated from my homes will go straight to my pocket and not to debt servicing. I can probably live the same quality of life on less income, AND I have the added ability to having my homes generate income well into my retirement, if I so choose.

    I plan on being like this guy because I’m doing it this way.

    So, what do you do with your money? Good question! Split the difference! Save half and use half to pay down your debt faster. That’s what I do when I can’t decide.

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