At least 4 million Americans are wasting money by accelerating their mortgage payments instead of investing in retirement accounts, according to a paper published by the Federal Reserve Bank of Chicago.
The money you use to pay off your mortgage has been taxed, which means, depending on your tax bracket and your state tax hit, you have only about 60 to 70 cents to show for every buck your employer paid you. Better to divert that dollar into your 401(k), because the full 100 cents goes into the account.
Let's say you and your significant other bring home $200,000 a year in a high-tax state and you are just starting to pay off a 30 year $400,000 mortgage at 6.5%. If you paid an extra $300 each per month toward those mortgage payments, you could pay off your loan nearly 12 years early. Sounds great, until you see Huang's math (UT professor who co-wrote the paper).
By diverting that $600 a month into your 401(k), you'd come out $44,000 ahead, she says. And that might even be lowballing it: for the purposes of their study, the researchers assumed you'd invest the money in bonds. A couple investing in stocks might see an even bigger gain.
Most of us, the authors suggest, worry too little about bad debt (e.g., credit card balances) and too much about the most benign (e.g., mortgages with tax-deductible interest). And this goes double for the surprisingly large number of people who don't take full advantage of their employer's 401(k) contribution matching programs.
Hey, it's Free Money!
this article was adapted based on the original article by David Owen, published in BestLife Online, September 21, 2007.
Mortgage broker serving the state of New Mexico with offices located in Albuquerque. Handling all forms of real estate financing including residential, commercial, land & new construction.
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Thanks Melinda, those are some eye-opening numbers. Many of our clients could benefit from this information.
Melinda:
Good post. The only thing I would add is use that money to buy more Real Estate. Put down the 10 or 20% on your next property. Why?
Buy a 100.000 dollar property in say Austin Texas and you put down 10,000 based on last years appreciation your double your money in one year. Appreciation last year was 10%. And you earn it not only on the 10% you put down but also on the 90% you borrowed.
Leave it to a realtor. Ha
Melinda:
Thanks for your comments back and for adding me as an associate. Good luck in all you do. If I can ever help any of your clients in this direction let me know and I will do the same for any heading your way. Have a great week.
Hey, can you post this in the Real Estate and Taxes Group?
Great post Melinda. I am a big believer in not pay off the mortgage. Back in my parents days that was cool because you work for the same employer for life. Today things are different ; maximising your dollar is the direction we should all be looking.
Excellent post!!! I have a family member that I discuss this with often. If the money you invest realizes a return higher then the net cost of your mortgage, then you made a good financial decision. Period.
Melinda, It is too bad people just don't get it. You can lead them to the bank but you can't make them think. They sometimes will play follow the leader with out knowing where they are going.
Don Eichler
Great post! I think we get caught up in wanting to pay things off, and forget how to move our money into the most strategic positions. I know this is one I hadn't thought about. Thanks!
You can write off all of your home mortgage but that is not true of other write offs. Rental investment losses are subject to the Alternative Minimum Tax as are other investment losses. Best to borrow on your house if you have to have debt.