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My Money Blog gives me the excuse to revisit that old chestnut – a favorite of mine, since it is so emotive and is bound to piss off Ramseyphiles, saying:
I’ve been thinking more about whether I should commit some additional funds to pay down the principal on my mortgage and reduce my interest paid.
I like this opening sentence, because it clearly provides the financial motivation to pay off your mortgage early: to reduce your interest paid.
Since interest doesn’t gain you anything, why not pay it off as early as possible?
Simple: because you still need to decide what to do with the mortgage payments that you USED to make, once you stop making them?
If you want to get rich(er) quick(er) you’ll probably put them into some sort of investment that earns you at least an 8.5% long-term return … and, if you REALLY want to get rich(er) quick(er) you might even borrow money so that you buy an even higher performing investment (e.g. ‘start a business’ funds, investment property, margin loan on stocks, etc.) …
… you’re being smart!
But, if you are going to do that later, why not start earlier, when you have more time to:
a) allow compounding to really ‘kick in’, and
b) recover if things should go awry?
Your answer, of course, will be: “because I have a mortgage to pay” …
… when it should be: “you’re right, otherwise I won’t have a retirement”!
We would normally leave things there, but My Money Blog finished his article with a nice suggested strategy when deciding if to pay your mortgage early:
My idea is to simply look at the current yield of a comparable U.S. Treasury bond and compare it to my mortgage interest rate. If my mortgage interest rate is a lot higher than the bond rate, then I should pay extra towards the mortgage. Otherwise, if the Treasury rate is higher, then I should invest in bonds or bank accounts directly instead. If it’s close, stick with liquidity.
My Money Blog seems to have the right idea: compare the AFTER TAX mortgage savings with what you can earn elsewhere, but comparing to the cash / bond rate is too conservative for most people.
Look, you’re in this for the long-term (eg do you have 20+ years left before you plan to retire?), so put your money where you can get the best 20+ year return; this is the order:
Businesses
Real-Estate
Individual Stocks
Index Funds
Bonds
CD’s
Cash
Start as close to the top as you feel comfortable handling eg
You may have no interest/aptitude in either real-estate, businesses, or even learning about how to value companies/stocks, so you may simply buy a low cost Index Fund and wait 20+ years for your return …
… but, no matter which you pick (unless, you are wading down at the Bonds, Cd, Cash end) – and, you have 20+ years to ‘play with’ – it’s really no contest 😉
