No. of Recommendations: 5
When you owe nothing and are totally debt free, the choices you can make in life become exponentially larger.

I have no quarrel with this general statement, but I do not agree that it leads to the conclusion that money available for investment should be used to pay principal on a home mortgage, especially a mortgage at a historically low rate (and even more especially if refinancing is available at an even lower rate).

Unless the entire mortgage is paid off, paying down principal does not reduce the monthly payment on the loan, so as a matter of cash flow you are no more free than you were prior to the pay-down - the mortgage will simply be paid off sooner. More important, money paid into principal of a home is illiquid - you can't get it out for any purpose, emergency or otherwise, without selling the home. I believe a better choice, in general, is to take whatever you were thinking of putting into the principal payment and placing it instead into the Vanguard 500 or similar fund. That way you can get the money out fast if you need it, and if you don't need it and the fund rises more than about 3.5%/year (you get a deduction for the 4.75% interest you're paying, so actual interest cost is only about 3.5%), you will end up with more money in the fund than you would have paid in principal and saved in interest not paid. The major caveat I have to this approach right now is that the market seems to be quite richly valued on a P/E basis, so I don't think I would put money in if I thought I might need it in 1-5 years. But for those in for the long run, this approach should work out better for most.

Print the post  


The Retirement Investing Board
This is the board for all discussions related to Investing for and during retirement. To keep the board relevant and Foolish to everyone, please avoid making any posts pertaining to political partisanship. Fool on and Retire on!
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.