No. of Recommendations: 1
The original post poses one either/or choice. Several additional choices are implied but not stated. This is how some of the list looks to me:
1. Prepay fixed rate mortgage vs. S&P 500 in QRP (Qualified Retirement Plan)
2. Prepay adjustable rate mortgage vs. S&P 500 in QRP
3. Prepay either mortgage vs. a non S&P 500 in QRP
4. Prepay either mortgage vs. non S&P 500 in non QRP

The issue of S&P vs. non S&P investment vehicles has been flogged to death repeatedly. I won't revisit that issue here. Thus, #s 3 & 4 will remain unaddressed.

With reference #1: If you have a fixed rate mortgage, prepayments will not affect your required monthly payment. In the event of some emergency, your full payment will still be due. Access to any of the money in the QRP will be governed by the terms of the plan. Further, your money into the plan will be dollar cost averaged, which will have some impact on your long term rate of return. If we get into a protracted period of low positive, or negative, returns, this should happen in tandem with some fluctuations in mortgage rates. You should at least be considering a tactical move to refinance. Finally, your prepayments of principal will result in (a) an increase in incme taxes due to decreased interest deductions and (b) foregoing of the tax benefit associated with contributions to your QRP.

With reference to #2: If you have an adjustable rate mortgage, prepayments will affect your required monthly payment, which is recast at each adjustment point. Prepayments may result in a lower required payment, all other factors being equal (i.e., your interest rate at adjustment did not go up enough to offset the impact of prepayments). The tax implications are the same as above.

Before embarking on either strategy you should develop appropriate cash reserves. I recommend that my clients maintain reserves of from three to six months of non-discretionary expenses. This should be anough to weather most crises. These reserves serve to protect your illiquid assets (like the home) as well as your liquid assets which are at risk due to market volatility.

Finally, if your only two goals in life are to retire the mortgage and then retire, your planning agenda is relatively straightforward. If you have other goals and aspirations those should be taken into account when making your decision. What you do in your present situation will impact the choices you have for addressing the other matters. Make your decisions holistically.

Regards--dharmadollars
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