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Dear Dr. Don,
I am 31 and want to pay off my house as soon as I can because I don't like owing people money. I have $195,000 left on my
mortgage at 6⅛ percent. Would it be wise to pay off my house? (My goal is to do it within six years.) Or, should I
start saving for retirement?
I am not currently saving for retirement because I'm putting my savings toward paying off the house. I feel
if I can pay off my house then I would have plenty of time to save for retirement at 37 years of age. I am currently putting
$2,000 extra toward principal each month.
-- Nick Noloan
Dear Nick,
If your company matches all or part of your contributions to a retirement plan, you should -- at a minimum -- contribute up
to the limit of the company match. That's free money that you don't want to leave on the table for the next six years.
My rule of thumb is to prepay your mortgage if the after-tax return on your investments is expected to be less
than the effective (after-tax) interest rate on your mortgage.
You can estimate the after-tax (effective rate) on your mortgage using Bankrate's
"Mortgage tax deduction
calculator." The more conservative you are as an
investor, the easier it is to justify prepaying your mortgage.
If you're making additional principal payments of $2,000 a month on your mortgage, you have enough income
to work toward both goals.
The earlier you start investing for retirement, the longer that money has to grow. Waiting six years to start
saving for retirement makes it that much harder to meet your financial savings goals for retirement.
The "Should You Prepay?"
calculator on SmartMoney.com is one of the easiest calculators to use in making a mortgage prepayment decision.
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