Early Mortgage Payoff vs. Retirement Savings: A Look at the Tradeoffs

f you have a home mortgage, you know it’s a big deal. A massive, 30-year big deal. But you also know that retirement is a big deal. Paying off the mortgage and saving for retirement are generally two of the largest monthly expenditures for many households. So, which should you prioritize? Everyone’s situation is unique, but there are some helpful guidelines. 

While debt is generally viewed as a bad thing, not all debt is equally bad. A mortgage is debt that allows you to purchase a home in which to live, often offering tax incentives as well as a potential appreciating asset. This isn’t like credit card debt after a shopping spree. Mortgage rates are almost always much lower than other forms of debt, too. When considering the tradeoffs of paying down your mortgage early versus saving for retirement, think of it like this: you are essentially borrowing at a low rate to buy a home while using the extra cash savings to fund your retirement portfolio, which usually gets returns higher than your mortgage interest.  

Let’s look at an example: 

Assume you have a 30-year mortgage of $150,000 with a fixed 6.0% interest rate. You'll pay almost $174,000 in interest over the life of the loan, assuming you make only the minimum payment of $900 each month. Pay $1075 a month—$175 more—and you’ll pay off the mortgage in 20 years, and you’d save over $65,000 in interest. 

Now, let’s say you invested that extra $175 every month instead, and you averaged an 8% annual return. In 20 years, you’d have earned about $103,000—$38,000 ahead of the sum you saved in interest—on the funds you contributed. Keep depositing that monthly $175, though, for 10 more years, and you’d end up with approximately $260,000 in earnings. 

So, while it may not make a huge difference over the short term, over the long term, you’ll likely come out far ahead by investing in your retirement account. 

Paying a mortgage off, or down, early is a great thing to be able to do. Starting early on, saving for retirement is also great for your finances and your sense of well-being. The money you spend paying off your mortgage won't be compounding, and the rate at which it grows in a 401(k) or IRA will most likely be greater than your rate of interest on your mortgage. 

Given the choice, which should you prioritize? Well, it depends on several factors, but all things being equal, it’s probably best to prioritize your retirement savings. You can borrow money for a house, but you can’t borrow money for retirement.  

Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

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