Saturday, December 19, 2009, 3:29AM ET - U.S. Markets Closed.

Laura Rowley Money & Happiness

Laura Rowley, Money & Happiness

The Cost of Peace of Mind

by Laura Rowley

Email this Page IM this StoryBookmark this StoryAdd to your Del.icio.us accountDigg this StoryPrint this Story
Good (1067 Ratings)
2.8472352/5
Posted on Thursday, April 26, 2007, 12:00AM

Jim Schenke, a 40-year-old writer/publicist for Purdue University in Indiana, is a conscientious saver.

Married with a toddler, Schenke has set aside a full year's salary in an emergency fund, because he and his wife decided she would stay home after their daughter was born 18 months ago. That cut their $50,000 income significantly.

Where the Money Goes

Their cars and student loans are paid off, and they studiously avoid credit card debt. Schenke also makes an extra payment each year toward his fixed-rate, 30-year mortgage, which has an interest rate of 6 percent. But he doesn't contribute to his employer's 403(b) plan; Purdue sets aside $5,000 annually for his retirement.

"The only company I owe money to is my mortgage lender, and I'm going to be beholden to them for as short a time as I can be," says Schenke, who follows the debt-free philosophy of the late Larry Burkett, founder of Crown Financial Ministries.

But a new study suggests Schenke might be better off putting that extra cash into the university's retirement plan. Researchers found that at least 4 in 10 homeowners would build more wealth by putting additional mortgage payments into a tax-deferred retirement plan, such as a 401(k) or 403(b).

The Best Possible Future

An estimated 23 million households face the mortgage prepayment versus retirement savings dilemma, the researchers found. Switching the money to retirement savings would save U.S. households up to $1.5 billion a year, they estimate.

"We're not telling people they should save more -- the study is about making optimal use of savings," says Gene Amromin, financial economist with the Federal Reserve Bank of Chicago, who conducted the research with Jennifer Huang of the University of Texas McCombs School of Business and Clemens Sialm of the University of Michigan. "If you were to move a dollar from here to there without increasing risk, would you come out ahead?"

Using data from the Federal Reserve's Survey of Consumer Finances, the researchers examined individuals who had a fixed-rate mortgage with either a 15-year term or a 30-year term on which they made extra payments; were eligible to participate in a tax-deferred retirement account and weren't maxing out contributions; and took advantage of the mortgage interest deduction by itemizing tax returns.

"The tax code subsidizes both mortgage borrowing and 401(k)-type investing," says Amromin. Homeowners can deduct the interest paid on a mortgage, while workers who save in 401(k) plans reduce their taxable income by the amount they contribute, and the funds grow tax-free until they're withdrawn at retirement.

Do the Math

That makes it important to do the math before you make a savings decision. Consider a homeowner who takes out a 30-year fixed-rate mortgage at 6 percent, and is in the 25 percent tax bracket; he effectively pays 4.5 percent on the mortgage. "If you invest in Treasuries in your 401(k) plan that are earning 5 percent tax-free, that's a risk-free way of increasing your return," Amromin says.

Researchers examined household goals for prepaying a mortgage, and looked at what would happen if they invested the money in a retirement plan instead. For example, in the interest of making an apples-to-apples comparison, the researchers considered two investment scenarios:

Scenario A: The investor puts an extra amount toward his mortgage each year, paying off a 30-year fixed mortgage in 25 years.

Scenario B: The investor puts the extra cash in his 401(k) instead, investing it in Treasury bonds or mortgage-backed securities. After 25 years of paying the mortgage at a normal rate, the investor withdraws a lump sum from his 401(k) to pay off the house -- incurring income taxes (and a 10 percent penalty if the money is taken out before age 59-1/2).

Although mortgage rate, income tax brackets, and 401(k) contribution limits varied among households, in about 40 percent of the cases putting the money in a retirement fund beat paying the mortgage off early, the study found. "Basically, the investor met exactly the same goal of paying off the mortgage in 25 years by spending less money," Amromin says.

Conservative Estimates

How much less? Working backward, the researchers figured out the average difference on an annual basis: The investor who chose a retirement investment over a mortgage prepayment got to keep $400 a year in his pocket.

Amromin says the study probably underestimates the number of households that would benefit from switching a mortgage prepayment into a tax-deferred retirement account, because the researchers made a number of conservative assumptions:

• They assumed investors didn't get a 401(k) match from their employers. In reality, more than 90 percent of plans managed by Vanguard, one of the largest 401(k) administrators, offer a match.

• They presumed the investor would put the money into a low-risk investment -- Treasury bonds or highly rated mortgage-backed securities. Someone investing in equities would likely do better: Between 1926 and 2003, stocks returned an average of 10.5 percent a year on investment, while government bonds averaged 5.45 percent, according to Ibbotson Associates.

• They assumed individuals had a constant income tax rate over time. But retirees often slip in a lower tax bracket, making 401(k) contributions during peak earning years even more valuable. According to Federal Reserve data, 41 percent of households are in the top tax bracket before retirement, while only 18 percent are after retirement.

• The researchers excluded state tax obligations, which would also make the tax-advantaged features of the 401(k) more worthwhile during peak earning years. Currently, 43 states impose an income tax.

A Matter of Choice

For many homeowners, including Schenke, it's more of a psychological decision than a financial one. "If I own my house, I've got my stake," he says.

"Housing is the single biggest part of your costs, and if that's taken care of, I feel like I can get by on a modest income. Every dollar I put into a retirement account, I feel like it's gone for at least 20 years."

But if someone loses their job, no lender will offer a home equity loan, whereas money in a 401(k) could be withdrawn (albeit with a 10 percent penalty for someone younger than 59-1/2 as well as taxes). Meanwhile, the ability to sell a home in an emergency depends on market conditions.

An Outdated Approach

Why do so many people choose to put extra money into a mortgage when other options would likely increase their wealth? "This is really remnant of Depression mentality that has persisted from generation to generation," says Amromin. At the time, most mortgages had one- to five-year terms, with a lump sum payment due at the end.

"Any shock to income meant you couldn't afford your payment -- mortgages were much more susceptible to economic uncertainty," says Amromin, and roughly one-quarter of Americans were unemployed during the Great Depression. "It's fine to pay down your mortgage if it gives you peace of mind, but you should recognize what that peace of mind costs."

For more on the study, and a simple way to calculate the mortgage prepayment versus retirement savings choice, visit my blog.

Email this Page IM this StoryBookmark this StoryAdd to your Del.icio.us accountDigg this StoryPrint this Story

Rate This story

Good (1067 Ratings)
3/5
Sign-in to rate!

261 Comments

Showing comments 6-35 of 261<< PreviousNext >>
Sort: first to last

  • JohnG - Wednesday, May 2, 2007, 10:25AM ET  Report Abuse

    • Overall: 2/5

    OK article. How about the risk of not being able to get out of bed one day? It happens. If you don't know anyone like that, just wait a while. You will. Can you put a $ sign on that? Being debt free is the best way to handle family crisis. Having all your money in long term retirement won't help if your spouse is crippled in a car accident, gets cancer, etc. Life happens and to suggest we can save $400 per year just by saving instead of paying off debt is misleading and less than informative. If the statistics are correct about 20% of the population being disabled, this article does a great disservice to them.

  • Wes - Tuesday, May 1, 2007, 9:11PM ET  Report Abuse

    • Overall: 3/5

    For me here is only one debt, my house payment. I save 22 % of my Gross income 12 % in a 401 K with a dollar for dollar match on the first 8% pluse 10 % in a 5 % account. My wife saves 15% in her 401K which also has a 8% match. We have a balance of 73500 on the house PTI are 950/ month at 6.39% Bought the place in 2000 for 125K so in 7 years we have paied down our debt by 50K and will have the payment GONE Done and out of here in 5-6 years IF we keep up our extra payments. This my sound insane but buying a house for 125K and paying 175K WITH interest and in isurance and taxes in 14 years sounds GOOD to me! I was only able to get a tax deduction for the first 2 years after that the standered deduction was all I could get since we have no kids. Before anyone can even think about paying extra on a house you MUST be debt free as you can be NO CREDIT CARD DEBT get that gone ASAP! once your out of that hole DONT SPEND MONENY! Pay the bills and SAVE then and only then can you even think about paying extra on the house. If you work and a 401K with a match go for it! Add half your yearly increses untill you reach the MAX match then keep doing that untill you have that amount doubled. For get about a NEW car get them out of your head! Pay cash for a good used one. Do NOT SPEND MONEY! Once you see your savings GROW then Double it will become an addiction and make NOT SPENDING easy! Think about how hard you work for your cash? Now think about how to make it work twice as hard for YOU! You can get up to 5% in a savings account,CD or other means but if you have debt at 10-20% then you can make that money work 2 - 4 times as hard by paying off that debt. 7 years ago I had 5k in the bank including checking, a truck payment and 125K debt at 8% for a house. Today 50k in savings/checking the same in a 401K (Combinded with wifeys 401) We worked our butts off and SAVED but is it worth it?? I say Hell yes! By the way we make 70K gross. Debt is not wealth, You can not borrow your way out of debt, if you only want it you do not need it. Debt of any kind IS NOT HAPPINESS.

  • thanksfordeletingmypreviouspost - Tuesday, May 1, 2007, 2:06AM ET  Report Abuse

    • Overall: 2/5

    Hilarious. I posted earlier under a different name and it got erased for reasons unknown. If you want to host an open forum please let everyone have their say. It is very unfortunate that my post gets deleted. Take the equity from your home and buy 3 or 4 more. Let your equity work in your favor. Hire a property management specialist if you have to. gelleader.

  • James - Monday, April 30, 2007, 7:23PM ET  Report Abuse

    • Overall: 3/5

    I am a CPA and believe in the paydown but only after making contributions to 401k in order to get your matching and funding you and your spouse's IRAs. You also want to have some emergency savings in place as well so you don't have to fire sell your house or incur early withdrawal penalties on retirement accts. All that said, I pay an addl 40% on my mortgage every month because I want to pay less interest over the life of the loan. Just because I get 25% or so tax savings doesn't mean I want to spend the extra $1 dollar in interest to get 20-25 cents in tax savings. Like I said, I believe you do this after you have allocated resources to retirement and emergency savings.

  • Yahoo! Finance User - Monday, April 30, 2007, 3:19PM ET  Report Abuse

    • Overall: 3/5

    Very informative

  • Brent - Monday, April 30, 2007, 12:12PM ET  Report Abuse

    • Overall: 1/5

    What I don't like about this article is its either/or nature. The best approach is to contribute to your retirement and pay down your mortgage.

  • A mortgage professional - Monday, April 30, 2007, 11:40AM ET  Report Abuse

    • Overall: 3/5

    I think there is room to be somewhere in the middle on all of this. The point of the article is to make an educated decision about where to apply extra money if you have it. If you are not maxing out your 401K contributions, that should be your first objective before paying down a mortgage. If you have other non-mortgage debt, again, pay that off first before applying extra money toward your principal payments. If you are already doing all of those things, then you need to really need to "do the math" or consult a trusted financial advisor to figure out if you are better off paying down your mortgage or adding to your savings.

  • Yahoo! Finance User - Monday, April 30, 2007, 7:40AM ET  Report Abuse

    • Overall: 1/5

    As long as you contribute 15% to retirement, payoff the mortgage early. Why pay the bank more interest? If I had no mortgage on the home I wouldn't borrow against the equity in the home to invest!

  • Richard - Monday, April 30, 2007, 7:40AM ET  Report Abuse

    • Overall: 1/5

    I am an advocate for paying down your mortgage. I am also adamant about 15 yr as opposed to 30 yr mortgages. Most buyers of 30 yr mortgages reason they can afford more house for less monthly cash outlay. While this seems true, if you "DO THE MATH" as suggested in the article, a 15 yr mortgage only "costs" a relatively small percentage more per month. The savings in interest over the life of the mortgage is considerable. By following the principles of "pay it down asap" and "always take a fifteen year mortgage" my wife and I went from having a net worth of $65,000 18 years ago to a net worth of 1 million today. We did this by excersizing the sage advice of many old economic advisors. Live within your means, pay yourself first (save), take advantage of the few tax breaks allowed to poor people, be the best employee on the job, regularly give a portion of your income back to society (charity), build and keep a strong loving relationship with your spouse and when you get a raise, increase your savings by 3/4 of your net increase. Too late in life (I am 69), I discovered getting financially comfortable isn't difficult but, it takes discipline and a plan to become financially comfortable. You have to decide what it is that you want in your life. You have to come up with the plan. You have to implement it using the income you have right now. You have to excercise the will power to stick to the plan, to see it through to fruition. If you lack the knowledge to accomplish any portion of your plan, it's up to you to seek help for whatever weakness you have. You see, it's all up to you. Nobody else is going to care enough to do it for you. If you don't even know how to begin, you need to educate yourself by reading "how to" books and attend seminars on financial planning. You begin at the beginning no matter where that is. If that means buying the most basic book on budgeting, then that's what you do. Getting started is the first key. Staying on track is the second key. Our plan was to buy a house that met our immediate needs and take out a 15 year mortgage. Pay the principle down every month by what ever we could afford. In doing this we built equity fast. With the increase in value of the property and our equity we were able to refinance and pay cash for a forty acre parcel of land, five years later we sold the "little" house and bought a somewhat bigger house putting all the equity from the sale down on the new house our mortgage remained vertually the same. Four years later a nice vacation/retirement home came to our attention and by refinancing again we were able to put a sizable down payment on that home. Three years later our plans changed. We decided to move to FL (from WI). I was now retired, our primary home, and our "retirement" home had small mortgages compared to there market value and our forty acres was mortgage free. All this while we contributed to my wifes IRA and earned an average 10% growth per year. We found a 5 1/2 acre lot in rural FL just three miles from shopping and less than ten miles from the ocean. Following our "plan to financial freedom" we built a very comfortable, 3 br, 2 1/2 bath pool home with a current market of $750,000. We carry a $100,000 15yr mortgage at 5.375%. Our other investments total $400,000 for a net worth of just over one million. We drive 2002 vehicles (Buick and Dodge truck) both paid for with cash when new. I am certainly not bragging about any of this. If we had been more frugal we could be considerably more wealthy. We lived comfortably during this time, buying what we wanted. We just lived within our means and payed our credit cards in full each month, payed our mortgages down and educated ourselves as to how money works for us not for the bank. You can do the same and probably better. Live for today, save for tomorrow. Do it buy paying yourself first and in addition, pay that mortgage down, ASAP. You will be happy you did! It doesn't take luck, it takes discipline!

  • Doc - Monday, April 30, 2007, 12:00AM ET  Report Abuse

    • Overall: 1/5

    This article is yet another example of how the idea of using debt as a tool has been inculcated into the heads of many Americans. Debt has been sold so loudly, so aggressively and so often the even college educated financial planners, these so called experts, have been bamboozled by the greedy lending industry. The mathematical theory behind investing instead of paying off your mortgage may be prudent, however the real life application is far from wise, not taking into account risk, attitude, and the emotion involved. The user comments are what I find interesting about this controversy. In general, the people who are in favor of eliminating debt are merely obstreperous regarding the article. On the other hand, those who are averse to paying off the mortgage seem to be attacking their opposition as uneducated morons who can’t discern a HELOC from a Roth IRA; how gauche. When polled, seventy-five percent of the Forbes 400 cited becoming and staying debt free as the best way to build wealth. Who are you going to believe, experts who are broke or America’s richest citizens?

  • Yahoo! Finance User - Sunday, April 29, 2007, 11:20PM ET  Report Abuse

    • Overall: 1/5

    I think that paying off your mortgage in just 25 vs 30 years is not really "early". The financial gurus I have listened to suggest paying off your mortgage in much less time, therefore making it a better investment because then the extra funds can be put in 401k or 403b.

  • Yahoo! Finance User - Sunday, April 29, 2007, 11:14PM ET  Report Abuse

    • Overall: 1/5

    Do the Math - Before you do the math you have know how to calculate 30 year and 15 year mortgages. Search "The Asher Report" you will learn that the 1st year of a 30 year mortgage you pay 580% - The 5th year you pay 102% - You do not pay that 6% until year 30. If you apply the true interest rate you are currently paying to the author of this articles math concept, you will not be better off.

  • DebbieS - Sunday, April 29, 2007, 10:24PM ET  Report Abuse

    • Overall: 1/5

    Depending on your mortgage, sending anywhere from $100-$200 extra each month and applying it toward principal can drastically reduce the term of the mortgage. This small amount can mean the difference between a 30yr mortgage or a 25yr mortgage. It will not give you an additional five years of retirement income if the same amount is put into your 401k. When your house is paid off, you can put the entire amount of the mortgage payment in your 401k until you retire. There is no right or wrong. Each individual has their own financial situation and has to decide what is best for them.

  • Yahoo! Finance User - Sunday, April 29, 2007, 10:15PM ET  Report Abuse

    • Overall: 1/5

    Well, I will pay off my 30 yr. fixed, in a total of about 17 yrs. Even if the financial types are right, I could care less. I quit adding to my 401(k), for now, as I have a huge distrust for all of these schemes. (Remember Enron ?, or look at most Airlines) As far as Depression Era mentality, I would hope so, just look around you. Pay is stagnant, jobs being shipped by tens of thousands out of the country. Crooks and thieves running many large American Corporations, and the majority of American's barely making it and racking up TONS of personal debt. I feel for those that cannot see where we are heading. Yea, I may not come out as well, but my house will be payed off, while others are without. The financial RAPE that continues unchecked should be more than a red flag for where we are headed.I believe it's quite foolish to take advice from those that charge obscene amounts, in interest. As for me, I'll have a paid off house, and, oh yea, save tens of thousands in interest.I can live just fine with that, and keep the low life crooks out of my back pocket.

  • Yahoo! Finance User - Sunday, April 29, 2007, 9:59PM ET  Report Abuse

    • Overall: 1/5

    I agree with the person who mentioned Dave Ramsey earlier. Banks need people to stay in debt to survive. If the argument is pay off the mortgage or invest in 401K, etc, you probably are living far beyond your means. There is no reason one cannot pay off the mortgage a little early AND invest in retirement if you follow a budget and live a lifestyle that fits your income. Buy "Total Money Makeover" by Dave Ramsey or listen to him on talk radio. It totally changed my viewpoint on finances and debt!

  • The Resident Genius - Sunday, April 29, 2007, 9:56PM ET  Report Abuse

    • Overall: 5/5

    This is not a new concept and, contrary to some the numbskulls who gave it a one star rating, makes PERFECT financial sense. The well-known financial planner and radio talk show host Ric Edelman has been espousing this method for at least 25 years. I was skeptical myself when I first heard Ric talk about it, but I ran the numbers myself (I'm a financial analyst). It is by far the better of the two strategies. One thing though: only use this method of investing if you'd prefer to retire with more money in your investment portfolio. If you'd rather have your money locked up in your house in the event of an emergency and have less money for retirement, then by all means pay off your mortgage early.

  • Yahoo! Finance User - Sunday, April 29, 2007, 9:37PM ET  Report Abuse

    • Overall: 5/5

    The average home owner stays in the same home for only 4 years. Who in their right mind when taking out a 30 year mortgage goal is to pay it off??? 30 years?? not anymore. the interest is tax deductible, the market fluctuates up and down tremendously. If you pay off your mortgage and have all this equity in your home - good for you. What if the market crashes again and your home depreciates 100k your out of luck. equity is money under the mattress not growing and basically useless. Take your extra money that you planned on putting towards the mortgage and invest it. Pay interest only, negative amortization whatever you can save money on and invest that somewhere else. Whats more important, a dollar today or a dollar tomorrow? Obviously you can make a dollar today a lot more dollars tomorrow if invested correctly. The housing market will continue to go up and down a guaranteed return will not. Owning a house free and clear is not how to do things nowadays its all about compound interest.

  • Odie O - Sunday, April 29, 2007, 9:36PM ET  Report Abuse

    • Overall: 1/5

    Job loss is a huge factor to take into account. Cost of living is so high, wages are not increasing substantially and homes are so expensive with mortgages getting so large now it takes often two incomes just to get by. Just having savings alone for 6 months wont help much in a real emergency situation and drawing from a 401K like its an ATM machine will cost a hell of a lot more than peace of mind will.

  • Yahoo! Finance User - Sunday, April 29, 2007, 9:23PM ET  Report Abuse

    • Overall: 1/5

    Many people are working past the retirement age now, and if 18% of retirees are in the top tax bracket at retirement, drawing on an IRA when required to do so can be costly. Many people have large mortgage debt and having a large mortgage payment due every month can be risky if one or one's spouse/partner becomes ill, which is very likely in one's lifetime, and one of the reasons many people have to sell their home. Pulling money out of an IRA for emergencies like medical payments and mortgage payments can be very costly, whereas if one has large savings to draw upon and no monthly mortgage payment due there is little chance the house needs to be sold in a hurry. If one has to help pay to take care of their elderly parents later in life, it is beneficial to not have a mortgage payment as funds can go towards their care. Many people draw upon their home equity to pay for their children's education, home equity loans can have lower rates than student loans and home equity loans don't have to be paid back for up to 30 years. If one's house is paid for and one or one's spouse/partner is working, they can draw upon a large amount of equity in their home to pay for a teenager's education which can cost up to $200K, and this can multiply if one has many children. Pulling money from a 401K and paying a penalty for withdrawl to pay off the mortgage or for their children's education may not make any sense if one's mortgage owed or education costs are well into the several hundred thousands. Those who pay off their homes may take their savings and put them into other investments such as business opportunities and purchasing other real estate or securities investments which may have a higher ROI then just the 401K. Everyone's situation can very different as there are many variables in everyone's lives.

  • Yahoo! Finance User - Sunday, April 29, 2007, 9:13PM ET  Report Abuse

    • Overall: 1/5

    What a JOKE!!! Don't payoff your mortgage so that you are in DEBT!!! Where are most of these so-called EXPERTS working? Credit Card companies and Banks I'll bet. If you want to REAL information on how to save some $ LISTEN TO DAVE RAMSEY's radio program. DAVE tells it like it is. I'll bet not one of these experts can tell me what the price of a gallon of milk or a dozen eggs cost. If you do what this article says, all you will do is make banks more money, pay more taxes for longer time, and have to put off putting more into your retirement fund.

  • Yahoo! Finance User - Sunday, April 29, 2007, 8:58PM ET  Report Abuse

    • Overall: 4/5

    I have read quite a few posts that suggest the mortgage companies are supporting this and funding this article. This idea is not accurate and not true. Lending institutions need money to lend money. The faster that a bank or mortgage lender recoups their money, the faster they are able to lend it out and make more money. Once you pay the lender the money it is gone forever and once you have equity in your home you are getting a 0% rate of return on that equity and are decreasing the safety and liquidity of those dollars. With an idea like the author proposes it is important to understand before condemning. Be open minded and do the research for your personal case and don't think that this is a ploy by the lending industry. This idea keeps the money away from the lenders!

  • GM - Sunday, April 29, 2007, 8:50PM ET  Report Abuse

    • Overall: 5/5

    This is the best advise I've seen in quite sometime. Everyone rating this a single star is completely missing the point. Ok, you have a loan at 6% and could pay it off or put your money in stocks and get an S&P 500 average of 10.5%. (stock market has gotten 11% average since 1930)... Look at it this way, if you had two investments which would you want? The one returning 6% or 11%... This should get your attention... 11% RIGHT? I'll take advantage of that 5% interest spread all day long; even for 30years or longer... Thus, my mortgage is a 6.5% no points interest-only with a seven year lock. My payment is less than a conventional and I invest that $300 difference in my 401k monthly to take advantage of the interest spread. As an Accountant by profession, I ran the numbers and found at year 30 my 401K balance was 200K higher after paying off the full balance of my $300K mortgage. The best advise I can give you before scoffing at this article is to do the calcs yourself. Yes with a pencil paper, calculator or spreadsheet. You must have the self discipline to do it though. If you need help with the calcs, get a CPA to help you. It will be worth the $200-$300 dollar hour long visit to have an additional $200K at retirement don't you think? As for worries about job loss etc... Well, I have the recommended 6 months savings in a money market / brokerage account. I sleep well at night knowing I will have an additional $200K at retirement which could mean an additional 15K to 20K a year in my golden years. This idea is not as risky as it sounds. It's being smart. No one looks after your finances better than you will. EDUCATE YOURSELF WITH REGARD TO YOUR PERSONAL FINANCE...

  • Todd - Sunday, April 29, 2007, 8:36PM ET  Report Abuse

    • Overall: 1/5

    LOL. Simply put...this is terrible "pie in the sky" advice. People need to show a little more restraint with their daily habits and understand their financial limitations.

  • C - Sunday, April 29, 2007, 8:08PM ET  Report Abuse

    • Overall: 5/5

    The author provides some great points for everyone to delve into personally. Don't listen to all the people of an older generation dogging the author. I'm 24, working in the finance industry, and have worked with plenty of debt ridden customers. Granted, if you are unable to manage your money well, then sure, pay off your house as fast as you can. However, if you take the time to look at REINVESTING your money, your returns are well worth it. Think about it, you spend 40-60 hours a week earning the all-mighty dollar, so it's indicative that you take some time, sit down and look at options other than the old fail safe of paying your house off. It's all about running the numbers personally and seeing what works best for your finances. Employer stock matching alone tips the scales in my book, just make sure you are at least investing the maximum allowed for matching. Outside of the previously spoken of advantages, having a well paid mortgage loan is a great credit history builder. If you plan on getting loans in the future, it's imperative that you are able to show structured payment history and the ability to MANAGE debt, not just pay it off ASAP because you can't personally "deal" with it. People like this wouldn't know how to deal with a life changing scenario like losing a job, because they are used to just paying everything off ASAP and are a higher risk in my book.

  • Ben A - Sunday, April 29, 2007, 8:01PM ET  Report Abuse

    • Overall: 4/5

    The funny thing is most people don't understand money.....This author didn't do the greatest job explaining how this works. Its called Mortgage Planning. You see most people do get a 30 year fixed rate mortgage, little do they know that is the worst mortgage for them, and the best mortgage for the bank. Most people out there want to pay their house off ASAP. When in fact if they do that they end up paying around 3 x's more for the house because of the interest. I hope everyone knows mortgage interest is front end loaded, meaning you pay more interest up front. And the average american either sells or refinances every 5-7 years. Because of the way interest works (frontend loaded) if you do this the actual APR (how much it costs to borrow the money) is 102%. The only way you get that low FIXED rate is if you pay that mortgage for the FULL 30 years, if you pay it off early at all the interest APR is higher than what you think. It really isn't a FIXED rate, so as you can see the banks LOVE these types of loans, that is why they push them so much. Now I understand that the goal is to payoff the mortgage. But what if there was a better way? One where you had control of the money and it was liquid (since every dollar you put into your mortgage is gone - unless.....you want to refi to get it out again, then pay interest on money you already payed off). You see, to most people their mortgage and their home is their biggest asset. Yet they sink every dime into it to get it payed off. If someone were to do a non traditional mortgage like a interest only or even a deferred intresest loan, and saved the difference in a liquid TAX ADVANTAGED account they could have the amount saved up in around 15-18 years. And have access to that money should a REAL EMERGENCY arise. And the best would be if you had a $200,000 mortgage and $200,000 investment, would you take that investment and kill it to pay your mortgage off???? Or maybe set it up to pay or mortgage payment and earn interest on top of making the mortgage payment. Which would you choose? The funny thing most people leaving comments don't even know how these things work, they just go with they've been taught and what Joe Blow does next door.

  • Yahoo! Finance User - Sunday, April 29, 2007, 8:00PM ET  Report Abuse

    • Overall: 1/5

    The eternal debate! Both are good choices. But there is nothing, I repeat, nothing like having your mortgage paid off. We paid off our house in 17 years and we also made sufficient contributions to our retirement while driving second-hand cars. Friends, it is such a great feeling to *not* have a mortgage. So what that it cost us $400 per year?! Big Deal! This author is doing a big disservice by not emphasizing the upside of being debt-free. She probably has a sky-high mortgage herself and is justifying taking out the home equity line of credit to pay off her credit cards...

  • BK - Sunday, April 29, 2007, 7:58PM ET  Report Abuse

    • Overall: 1/5

    Um... so basically do the math before deciding what to do with your money. thanks a lot.

  • Kevin - Sunday, April 29, 2007, 7:57PM ET  Report Abuse

    • Overall: 2/5

    Paying off early is good as long as it's not to the detriment of everything else... which is what I'm going through witht he wife. She's obsessed with paying off the mortgage to the exclusion of repairs and maintneance that the house needs. We've gone back and forth on this endlessly. She just has this Depression Era mentality when it comes to loans.

  • Yahoo! Finance User - Sunday, April 29, 2007, 7:55PM ET  Report Abuse

    • Overall: 1/5

    IMHO I would pay off my mortgage, The author fails to adress other expenses household expenses i.e. bills! Take taxes, I pay 10k a year in property tax alone, in the state of NH. Paying off a mortgage balance is a no brainer.

  • chicago3200000 - Sunday, April 29, 2007, 7:54PM ET  Report Abuse

    • Overall: 4/5

    So many are so negative about this article. Overall, she seems to be encouraging people to do the math and figure out the strategy best for them. In my situation, it is best to kick in enough money to get the matching funds from my employer. An automatic 60% return on my money is pretty good and beats out the mortgage pretty effectively. Last year, the investment choices did well gaining about 15%. So, with these pretty good sized percentage increases, it seems that in my situation it is best to kick money into the type of system that she suggests. My investment horizon is long and the historic average return on stocks beats out our interest rate on our home mortgage. I believe it is a balancing act. As a person gets older and their situation changes, stocks may not be the best idea. Regardless, I wish you all the best in your investment decisions.

Showing comments 6-35 of 261<< PreviousNext >>
The columns, articles, message board posts and any other features provided on Yahoo! Finance are provided for personal finance and investment information and are not to be construed as investment advice. Under no circumstances does the information in this content represent a recommendation to buy, sell or hold any security. The views and opinions expressed in an article or column are the author's own and not necessarily those of Yahoo! and there is no implied endorsement by Yahoo! of any advice or trading strategy.

More From Laura Rowley

Money & Happiness

Discover the secrets to financial happiness. Laura's book offers practical tools and positive strategies to create "the good life" in a meaningful way.

More about Money & Happiness

Learn to identify your values, banish debt, start saving, and investing; plus Laura's favorite online resources.

Order your copy of Money & Happiness today and boost your financial well-being!

More from Yahoo! Sources

  • CNN Money
  • Consumer Reports
  • Kiplinger
  • The Motley Fool
  • Business Week
  • Wall Street Journal

Historical chart data and daily updates provided by Commodity Systems, Inc. (CSI). International historical chart data and daily updates provided by Morningstar, Inc. Fundamental company data provided by Capital IQ. Quotes and other information supplied by independent providers identified on the Yahoo! Finance partner page. Quotes are updated automatically, but will be turned off after 25 minutes of inactivity. Quotes are delayed at least 15 minutes. Real-Time continuous streaming quotes are available through our premium service. You may turn streaming quotes on or off. All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.

Yahoo! Answers is provided for informational purposes only, and no Q&A is intended for trading or investing purposes. Yahoo! shall not be responsible or liable for the accuracy, usefulness or availability of any Q&A information, and shall not be responsible or liable for any trading or investment decisions based on such information. View Complete Answers Disclaimer.