Paying Down the Mortgage: Another View

In response to a particular point on my 2010 goals post — my aim to pay more money toward the principal on our mortgage each month — an acquaintance of mine posed a question: Why not take the extra $50 monthly that would go toward the mortgage principal and invest it instead? Surely we could see better returns… right?

He makes a valid point — if we invested that money in the stock market. Because heaven knows putting it into the bank or in a CD will barely net us 2%.

Also, the interest is tax deductible, and in the long term, contributions to another savings vehicle, like a 401(k) or Roth IRA, can put you ahead in the savings department. Liz Pulliam Weston makes valid arguments for this view. We’re already paying off higher-interest credit card debt (will be done in a few more months), beefing up our EF fund, and looking into life insurance.

On the flip side, paying extra on our mortgage will reduce our mortgage interest down the road. I outlined different extra payment scenarios back in September, and the idea of shaving 1, 3 or nearly 10 years off our mortgage — and saving tens of thousands of dollars in interest payments on the loan — is incredible.

The 5% interest on the mortgage is TANGIBLE — we’re getting charged it no matter what, and the interest is on a very large amount. Who’s to say how much interest we would gain if we put $50/monthly into other investments?  We could make 15% interest on the investment, sure, but we could lost 15%. It’s a crap shoot, basically.

It comes down to seeing immediate results vs. long-term savings. I think for now I’ll play it by ear. Maybe it’s worth an experiment: putting that extra money toward an investment vehicle, rather than toward the mortgage principal. Good idea, or no?

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