If you have additional funds, you may be considering two options: repay your mortgage Or save for retirement. In this guide, we’ll explore what should come first.

Option 1: Pay off your mortgage first

Let’s say you’re finally in the home stretch with a mortgage you took out years ago. It’s been a long journey and you’re tempted to pay it off in one final payment and finally be free and clear – or, at least, speed up your payments a little to do earlier.

Although it may seem tempting to pay off your mortgage toward the end, it’s actually better to do it at the beginning. Most of your money in these early years goes toward interest and does little to reduce the loan amount. main.

So, by making extra payments up front and reducing the principal on which you are charged interest, you could end up paying significantly less interest over the life of the loan. The same principles of compound interest that apply to your investments also apply to your debts. So, by paying off more of your principal sooner, the savings accumulate over time.

Other Mortgage Considerations

Mortgage interest is not the same as other types of debt. It’s tax deductible if you itemize the deductions on your tax return. In 2024, you can deduct mortgage interest on the first $750,000 of a loan secured by your home ($375,000 if you’re married and filing separately). For real estate mortgage debt incurred before December 16, 2017, you can deduct mortgage interest on the first million dollars of debt ($500,000 if you are married and filing separately).

If you need anything to reduce the amount you owe, Internal Revenue Service (IRS)the mortgage may be worth keeping.

If you have a variable rate or another non-standard mortgage, paying off the mortgage, even if it’s later in the game when you’re paying off more of the principal, can be an advantage. Building equity in a home financed with an adjustable rate loan will make it easier for you to refinance to a fixed rate mortgage if you ever decide to do so.

Additionally, if homes in your area are experiencing little appreciation or even depreciation, paying off a mortgage is one way to avoid going under (i.e. owing more than your House).

Option 2: Fund your retirement first

Just like it’s better to pay off (or reduce) a mortgage sooner, it’s also better to start saving for retirement earlier. Thanks to compound interest, a dollar you invest today is more valuable than a dollar you invest five or ten years from now. That’s because it will earn interest — and interest will earn interest — for a longer period of time.

For this reason, it generally makes more sense to save for retirement at a younger age than to pay off a mortgage sooner. You can estimate your retirement savings in the United States Social Security Administrationthe calculator.

Extra mortgage payments or saving for retirement

Let’s say you have a 30-year, $300,000 mortgage with a fixed interest rate of 4.5%. You’ll pay $247,218 in interest over the life of the loan, assuming you only make the minimum payment of $1,520 each month. Pay $1,896 a month, or $376 more, and you’ll pay off the mortgage in 20 years and save $92,000 in interest.

Now, let’s say you instead invested that extra $376 each month and got an average gain of 7%. annual yield. Over 20 years, you would have earned approximately $186,000 from the funds you contributed. Continue depositing that $376 per month for another 10 years, and you’ll end up with a total income of almost $429,000.

So while it may not make a huge difference in the short term, in the long term you’ll likely get a big head start by investing in your retirement account.

A compromise: finance both at the same time

Between these two options lies a compromise: funding your retirement savings while making small additional contributions to pay off your mortgage. This can be an attractive option in the early stages of the mortgage, when small contributions can reduce the interest you will ultimately pay.

The essentials

As a general rule, you should not sacrifice your retirement plan by focusing too much on your mortgage. By prioritizing your retirement savings goals firstly, you can then decide whether it is better to put the extra savings towards additional contributions to your mortgage or other investments. The money you spend paying off your mortgage will not compound, and the rate at which it will grow, say, in a year. index fund could be higher than your mortgage interest rate.