Q My husband and I have discussions about what to do with "extra money" we may have each month. With stocks not doing so hot, we want to know what may be the right thing to do. Should we put our extra cash toward paying down our mortgage or bank more cash and bulk up our Roth IRAs? We already max out our 401(k) plans. The idea of paying off our house early is really appealing.
Paying off the mortgage feels good, but maybe isn't best
A In the heart of most homeowners burns an intense desire to say goodbye to mortgage payments. It's a wonderful moment. If you have the money, there's nothing wrong with paying off a mortgage quickly to live debt free.
By accelerating your mortgage payments, you can get a good return, especially in this market. Let's say your mortgage rate is 6 percent. By paying down your mortgage early you'll earn the equivalent of a simple 6 percent rate of return. You'll save thousands and thousands of dollars in interest payments. While the tax deduction for interest helps, it isn't that valuable compared with what you will save in interest. It's important for most people to be debt free when they enter their elder years, too.
That said, a caution against getting too aggressive with mortgage payments: My basic problem is that most people end up putting too many of their financial eggs in one basket -- a home. That makes your financial health increasingly dependent on how one asset performs and, as we are seeing right now, home prices can go down as well as up.
For me, the key is building a well-diversified portfolio of cash, stocks, bonds, commercial real estate, commodities and international equities. The value of your home will shrink as a percentage of your net worth. Once you've built a well-diversified portfolio, then yes, do pay off the mortgage.
Chris Farrell is economics editor for American Public Media's "Marketplace Money." Send questions to cfarrell@mpr.org, or to kaching@startribune.com. Put "Your Money" in the subject line.
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