Should You Pay Off Your Mortgage or Contribute To Your Retirement Savings Plan?
Should I pay down my mortgage or contribute to my Retirement Savings Plan? — a dilemma faced by many people.
What to consider
Paying down the mortgage sooner adds up to more savings in interest payments over the long haul. The advantage of contributing to your retirement savings account is that you can potentially reduce your taxes and build a nest egg. There are advantages to both.
Interest Savings
If you have a mortgage balance to be renewed upon maturity, consider the interest savings based on the renewal rate, not the current rate. Think in terms of pre-tax rates as opposed to the actual mortgage rate.
The mortgage on your principal residence is not tax-deductible, so you are paying it after taxes. If mortgage rates climb to 5 percent in the coming years and you’re in the 35-percent marginal tax bracket, paying off the mortgage faster means you’ll be getting a guaranteed pre-tax rate of return equivalent to 7.69 percent. Making extra mortgage payments reduce the principal amount. So you save not just interest but the tax on that interest because you are paying the mortgage with after-tax dollars.