In our last post, we discussed baby step #5 and mentioned how steps 4, 5 and 6 are to be worked on simultaneously. And, that it is our humble opinion, steps 4 (investing 15%) and 6 should take precedent over saving for your children’s college (step #5).
Now, on to the debate that every single personal finance blog has touched on at least once; do you pay off your home early or invest more money? Which one will be better, financially speaking, in the long run. There are a ridiculous number of variables to consider: Do you plan on staying in your home long term? What is the interest rate of your mortgage? How much is your home worth? How much principal do you have remaining to pay off? What return do you expect on your investments? How soon do you plan to retire? What do you anticipate the rate of inflation will be? It’s enough to make you dizzy.
There are so many reasons to pay off your home early but, on the flip side, there are just as many reasons to not do so. Saying that, we are a firm believer that taking out a 30 year mortgage is never a good idea. Yes, we have always taken out a 30 year mortgage but we have also realized, after this 3rd time, that if you can’t afford a 15 year mortgage on the house, you really can’t afford it. Fifteen years goes by so very quickly, 30 years can feel like a life sentence of bill paying. Plus, you get better interest rates with a 15 year mortgage and, if you are able to send even more money to the bank to pay down the principal, it will knock even more time off your mortgage.
We have watched people perform long complicated math to figure out whether paying off the house or investing the extra money will yield the best results. No matter how detailed you look into every aspect of the formula, there is just no way to predict the future. We have no idea what interest rates will be doing, or how investments will performing in the future. When you plug those numbers into the formulae, whether based on historical averages, or plucking them out of thin air, they are just guesses when you get down to the brass tacks. Then, there are also job losses, the possibility of needing to move, or more serious things like family illnesses. When it comes right down to it, only you can decide what is best for your family, in your situation.
As for our family, since we don’t plan on staying in our current house long term (we’ll be debt free the moment we sell), and we are (I think we’ve said this a time or two) “late to the game” when it comes to retirement savings, we have taken a slightly different approach. We are working to save more than 20% of income and, therefore, not hammering the mortgage as hard as others might think we “should”. While we did start out with the “classic” approach, through discussion and prayer, we gained peace with letting our mortgage principal stay larger longer while we worked to secure a stronger footing for retirement.