Friday, February 25, 2011

Follow Up on Pay Down the Mortgage

Following up on my post about paying down the mortgage. Yesterday, I read an article on which reinforced JKC's position that putting extra money towards our mortgage is, perhaps, not the right move.

According to the article, putting money towards prepaying principal is not the best course of action if (1) you've got other debts (that is a no for us) or (2) you are not maxing out your 401k (also a no) or (3) you don't have 6 months of cash for living expenses (we are close on this one).

The next question, is how long do you plan to stay in your home. We plan to stay at least 20 years so that tips in favor of paying off the mortgage.

Then look at the tax impact, our tax deduction is $4700 the first year and our effective mortgage rate (minus the tax deduction) is 3.2%. So putting money in the stock market, like JKC argued,* is a better bet since the historical return for the the S&P 500 is between 6% and 7% (of course from 1/1/2000 to 12/31/2010 the S&P 500 provided a 2.4% return).

So, I'm still pondering this one.

*I very much enjoy getting feedback from others so I take no offense to JKC's comments or anyone else.


Marty said...

Sounds like you guys need an IPS (Google investment Policy Statement). It forces you to document financial goals, portfolio statements, asset allocations, etc., and serves as your plan to attain those goals and lists a set of financial rules you pledge to adhere to. I have one and I review it regularly; it definitely helps


Andy said...

We are currently not paying extra on our mortgage, but if our income goes up we plan to. If you can get rid of your mortgage you have a lot of extra cash flow and if you have a major emergency, you won't have to worry about losing the house. For us it is about peace of mind, not necessarily extra money.

Also, I thought you had a really good post on Get Rich Slowly today. Keep up the good writing.

Anonymous said...

Hi Sam, CecilyC here! After reading your comment on my journal, I wondered what just sort of pushback you were getting about the decision to pay off the mortgage early. Seems like it's only one commenter pushing back, but as long as I'm here, I thought I would add my two bits.

Basically I think it all boils down to what your ultimate goal is. Do you want to make your retirement accounts hit a certain number by a certain date? Then put your money there. Do you want to be debt-free by a certain date? Then put your money there. Don't be swayed by anybody else's logic, even mine!

By the way: That CNN post was pretty superficial in its approach to whether to pay off the mortgage early, if you ask me...