Pay off the house or save for retirement?

Question

If you have a personal homeloan (ignoring IP's for now) are you pumping every spare dollar into reducing that debt, or are you putting some of it into other investments (e.g. managed funds etc) as retrement savings?

I'm interested in what other forumites are doing and why.Personally, I'm working hard on my homeloan because the cost of that is higher than the benefit of most retirement schemes. However I recognise that starting early with some kind of retirement savings is good for building it up (the compound benefit), and I'm wary of having all my investments in property.

So, for those who have made a concious decision to pay off the home loan first, or are also working on some non-property investments at the same time, why have you decided to go down these paths?

Alan Brymer · Answer

I used to be totally gung ho about taking foreveer to pay your mortgage off and investing the money elsewhere instead of merely paying off the loan and saving yourself whatever interest you're paying.

Then I read a course by John Cummuta called Transforming Debt into Wealth (and no, I'm not selling it) and it totally changed the way I look at the idea of paying off debt.  His reasons to pay off all of your debts, one at a time, are:

1) Peace of mind and personal satisfaction
2) You can't be guaranteed what your other investments will yield
3) You can use a credit card for emergencies, rather than use your savings, which would make paying off the debts take longer
4) You could realistically pay your mortgage off in 7-10 years and have more money to invest.
5) Your other investments might not pay you when you need them to and you find yourself in a cash flow crunch and not able to make mortgage payments

My reasons for paying off all personal debts are:

1) If you can buy and sell an investment house and make $30,000--why not just pay your mortgage off?  We creative investors are a group of people who can make ridiculous returns without using our own money.  Paying off your mortgage may not make you as much money as investing them money elsewhere, but neither does buying a fancy car or a house that is too big, or taking vacations to Hawaii, and isn't that what the gurus tell us we should do with all the money we make in real estate anyway?

We investors are in a position to make a LOT of money over the course of our lives, so I think we might as well do it.

2) I hate mortgage companies with a passion and look forward to the day when I will never have one to deal with.

That's one man's opinion,

Alan Brymer

N/A N/A · Answer

Generally, retirement funds are so much better because of their tax advantages that it's usually best to maximize those first. Once you've done as much as the government will let you in terms of retirement funds, it's time to start talking to your CPA about the possibility of getting that house paid off quickly.

You are only getting the tax "savings" for any amounts paid above and beyond the standard deduction (i.e., the amount in deductions you get to take without itemizing anything). For 2006 in the US this is a little over $10,000 for most couples (though there are ways it can be higher). If your total interest+taxes+other deductions fall below your standard deduction, then you are getting NO tax savings whatsoever from your mortgage. A lot of people fall into this category and do not even realize it. They believe they are getting thousands of dollars in tax savings from their mortgage (probably because they were told this by a mortgage broker) when, in fact, they may be getting no savings or a trivial amount at best. It's definitely worth discussing with your CPA.

Having a paid-off mortgage opens a lot of doors (and you can still enjoy the beauty of the standard deduction).

If you want to invest in real estate, having a paid-off mortgage is great. You can set up a HELOC to allow you to make quick, cash purchases without paying out hard money rates. If you are doing quick resale, then you just pay off the HELOC balance, pocket the difference, and move on to the next deal financed the same way. If you are doing long-term purchases  (rentals) you can still use the HELOC to make you a cash buyer, then finance the property once you own it, then repay the HELOC and move on to the next deal.

There are also a lot of intangible benefits to paying down debt, but that's more of a personal thing that's hard to put numbers on.

Eric Medemar · Answer

When considering whether to pay off your home first or invest in some other wealth vehicle for retirement you need to pay close attention to your oppurtunity cost.  If you home loan is at 6% interest and you are in the 25% tax bracket then essentially you are paying 4.5% interest.  If you can make more that 4.5% after taxes with any other wealth building product then dont pay off your house.

Historic returns on the stock market are between 10-11%, real estate returns blow the stock market out of the water in the risk vs return category.

If I were you I would try to properly leverage myself with some real estate that could benefit you at retirement as well as generate some cashflow that you could apply to accelerate your mortgage or another homes mortgage.

Frank Adams · Answer

To me it's always been something that doesn't fit into a neat "either/or" box. You wrote;

Most (in the USA) retirement saving programs have a "tax saving" angle to them, and generally employers give some sort of match. If your interest rate is higher than those two combined I'd suggest a part time job to pay that usurious interest rate off quicker.

I always took advantage of employer sponsored retirement plans (401K, 403b etc) up to the maximum allowed. After that I slammed every nickel I could get my hands on toward paying of my mortgages, STARTING WITH THE LOWEST BALANCE, not necessarily the highest interest rate.

I also did without things that a lot of people thought were absolutely NECESSARY; things like new cars, cable TV, the latest and greatest electronic thingies like big screens, walkmans, funny ringtones on my cell phone (I didn't have a cell phone until '95) and crap like that.

I always figured my TENANTS could buy junk like that and maybe I'd get lucky and they'd leave it behind when they moved! Don'lt laugh, except for  the newish car (I did once get a nice pick up truck) I've had tenants leave all of those things behind, also a gun safe, a hot tub (schweeet!) a nice leather jacket (just my size) and a couple of $K worth of other stuff that I yard saled!

By letting them do that and postponing my own ego I had 16 rentals by the time I was 40 had them all paid off before I was 45

My advice is DO BOTH.

all cash