If our homes are our castles, then our mortgages are the dungeons, because they lock us into debt. Best way to escape, paying extra principal every month. Say you have a $170,000, 6% / 30 year mortgage. Make your normal $1020 monthly payment and you’ll pay it off in 30 years and $197,000 in interest payments.

But suppose you pay $2000 a month instead of $1000. You’ll be free in 9 years instead of 30 and you’ll pay only $52,000 in interest, thus saving yourself $145,000.

So paying down a mortgage is certainly smart, but is investing it smarter? To find out, compare paying on your mortgage with what you could earn elsewhere. Mortgage interest is often deductible. If you’re in the 25% bracket and you deduct your interest, after tax you’re only out of pocket 4.5%. And stocks have historically done twice that much over time. And put that money in a 401 or IRA and you’ll bypass taxes too.

Bottom line, the numbers say if you have extra money, you’re probably better off investing it rather than paying down the mortgage. But thats just the numbers. Paying off your mortgage might also buy you peace of mind, something that investing in stocks might not do. And thats particularly true as you reach retirement age. So you really need to thing this one all the way through then decide.

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This entry was posted on Thursday, May 22nd, 2008 at 10:31 pm and is filed under Mortgage. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.