Taking out a mortgage can be a sobering experience. You’re probably borrowing more money than you ever have before. Then the interest adds tens of thousands of dollars to your original loan amount.
A lot of homeowners take one look at that bottom line and decide to pay off their mortgage early—no matter what. Some take it so far that they sacrifice retirement savings in order to pay off their home loan.
At first thought, it doesn’t seem like a bad idea. You pay off the mortgage early and have more money to devote to retirement investing once you own your home free and clear.
But that idea ignores the most important fact about investing: the longer you invest, the more your money can grow. If you delay retirement investing until after you pay the mortgage, you’re losing valuable time that you won’t be able to make up—even with increased contributions to your retirement accounts.
A $288,000 Mistake
Let’s look at two homeowners with identical incomes and 30-year mortgages. (Dave doesn’t recommend 30-year mortgages, but that’s what most homeowners have.) Jane Homeowner makes her regular house payments and invests $500 a month toward retirement over the lifetime of her mortgage. By the time she retires, she could have nearly $2 million.
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Joe Homeowner decides to double up on his house payments instead of investing for retirement. He pays off his mortgage in 15 years, but he has zero retirement savings. To catch up with Jane, he’ll have to invest $2,600 a month!
Look at it another way: Jane will invest a total of $180,000 for retirement. But because she started early, compound growth does the heavy lifting. Joe must invest a total of $468,000 for the same outcome—a $2 million-dollar nest egg and a paid-for home. Which bottom line looks better to you?
This is why Dave says you should first invest 15% of your income for retirement before you work toward paying off your mortgage.
Need to Talk About It?
If you’re still not convinced that retirement investing should come before you pay off the mortgage, you can talk to an investing professional.
Find an investing pro in your area today!