To pay off the mortgage or not, that is the question. And a highly debated one, indeed.
But the answer depends upon a person’s unique financial situation and mindset.
Investing is typically the winner when we rely strictly on the math for an answer. Average market returns are generally higher than the amount of saved interest from making additional mortgage payments. But even then, many factors can influence the outcomes, such as risk tolerance, market volatility, tax rate, and interest rate on the mortgage.
On the flip side, paying off the mortgage gives peace of mind and a sense of freedom. A mortgage is likely the most debt a person will ever have and paying it off gives a guaranteed rate of return (good for those who are risk averse).
We will start paying down our mortgage
If you have read our personal story, you know that we have paid off several thousands of dollars in student loans, as well as numerous consumer loans procured to purchase new cars. But you will soon see we have some serious mortgage debt.
The fact is, even with the good intention to do so, we have never made a concerted effort to reduce this debt. We chose, instead, to invest any extra money in retirement savings.
Whenever the discussion of paying down the mortgage comes up, I say we should try to throw extra money at the mortgage and my husband says we should invest the extra cash. So, you can guess what we have done. That’s right. Nothing. At. All.
Which is why I’m so excited about this post!
While it is true that we don’t have much extra cash flow at the end of the month, I figure given a little motivation, we will find a way! And publicly sharing our progress on the blog will definitely provide a needed incentive.
Since we debate about the best place to put extra cash, the compromise has morphed into a little experiment. Whatever extra money we can scrounge up each month will be divided in half – half will go toward the mortgage principal and half will be invested in a low cost taxable account.
We will share our progress with you
I will provide regular updates on the blog on our progress plus the financial (and other) benefits/costs of each method. Keep in mind, we won’t always have much extra to throw at this project, so some months will have little to show. (Though I’m guessing in the spirit of sharing publicly, we will be selling some items on Craigslist when all else fails!)
This post serves as the baseline data. Future posts will share the baseline compared to the extra payments and investments made.
Let’s take a look at the huge mountain of mortgage debt we have to tackle, shall we?
|Regular Monthly Prinicipal||407.57|
|Additional Principal Payment||0|
|New Principal Balance||264026.55|
|Interest Saved* (over life of loan)||0|
|Effective Rate of Return**||3%|
**Effective rate of return is interest rate after accounting for the mortgage tax deduction (deduction is less due to accelerated loan payoff)
|Rate of Return|
I know, there’s not much to look at here, as we are just getting started, but we are motivated, so stay tuned for updates!