Paying Down the Mortgage Question

JKC asked why we were focusing on paying down our primary mortgage (since we've got investment properties we have more than one mortgage, but that is a song for another day).

It is a good question and one that we have gone back and forth on. First, our primary mortgage rate is 4.7%. We refinanced our mortgage in 2009, we were 4 years into a 30 year mortgage so when we refinanced we selected a 25 year mrotgage so we shaved a year off the term. We also paid down the principal by about $4,000 - $5,000 when we refinanced (due to some rules in Fla. and to qualify for the better rates).

At present our balance is $278,776 and we have 23 and half years left. We plan to stay in our home until we retire.

In 2011, we are paying an extra $415 a month in principal prepayment. Doing so, assuming we continue at this pace, will shave 7 years off our mortgage and will save us almost $60,000 in interest.

But, really we would like to get to the point where we are paying an extra $500 (or more) per pay period or an extra $1000 (or more) per month so we could pay off our mortgage in 10-12 years, which would save us almost $100,000 in interest.

Why do we want to kill the mortgage? We would really love to be debt free. But, we also want to build our retirement/vacation home and we'd likely be trading mortgage debt on our primary home for mortgage debt on our retirement home. Another plus for paying off our home, we would be able to lower our insurance costs (insurance in Florida is expensive!).

So, I expect JKC's question is whether it makes financial sense to throw extra money towards the mortgage when we could be investing that money. It is a complicated question and the answer is not crystal clear (in fact, although we've thought about this issue, we really don't have a good answer). Regarding investing, we are not neglecting our investments in favor of the mortgage, we are maxing out our 401k(s) and IRA(s) each year (or coming close) which is $43,000 in investments. Last year we also invested $5,000 in a regular trading account.

But, instead of putting $415 towards the mortgage each month, we could invest that money in equities or other investments and probably could get a return exceeding 4.7%. We could also add that $415 to our emergency fund each month, but the return we get on paying down our mortgage exceeds the return we are receiving via ING (about 1% these days).

So, I guess my answer to JKC is that we are paying down our mortgage as part of our savings plan for our retirement/vacation home. At present, we are not neglecting our investments in favor of the mortgage, but to the extent we increased our principal prepayment to $1000 a month we would need to analyze the opportunity costs of paying down principal vs. investing. Paying off our mortgage would also save us money in insurance costs.