Should a Mortgage Be Paid Off Early?

Should you get a 15 or 30 year mortgage? I personally feel a 30 year because you can always pay it as a 15 year if you choose, yet are not locked into higher payments if you lose your job or an emergency should arise.

Now should you pay off the mortgage faster than either 15 or 30 years? I say yes, but only if you are already maxing out your retirement savings, have a comfortable cushion on savings for new cars, maintenance of the homes/cars, vacations, college savings, and any other expenses.

Now why? Because as long you are disciplined and save the excess in say a 401k or Roth IRA then you are making more than your current 6% mortgage rate. Now to max out your retirement you should be saving $19k/year. If you follow the 15% rule, that means you need to be making $126k/year.

So my philosophy is this, instead of paying off the mortgage, max out the 401k and Roth IRA and take advantage of the tax break. You also get a tax break on the mortgage, but that's not a reason to keep it. Keeping it for investment purposes will help because when you retire, you need to generate enough income to throw off the property taxes you may owe when you retire. Those never go away, only the mortgage.

Now if you are in the 15% federal tax bracket, by investing in a 401k, you are already gaining an extra 9% on your mortgage, and you have compounding returns on your investment. So you are coming out way ahead by saving in a 401k.

You reply, I'll have my mortgage payment to invest if I pay off the house. Sure you will, but you can not go back to 2006 and max out your 401k or your Roth IRA. You will be forced to invest in a taxable account where you will pay taxes on your interest/dividends going forward. That means every year you will pay taxes on your money as it grows unlike a typical retirement account.