Paying off Mortgage Early vs. IRA Investments

Hi all - wondering if the community could help with this question. 

I'm mid-40s and I've been thinking that rather than contribute yearly to an IRA, it would make more sense to pay off our mortgage more quickly - say, in 5-10 years - and get out from the mountain of interest that we're paying. At the same time, contributing to my son's college fund. We can't afford to both contribute to an IRA AND to pay it down quickly.

What have people done? What has worked and not worked for them? 


If you have a 30 year mortgage you might look into refinancing as a 15 year mortgage, especially now before the Fed raises rates. We did this a year or two ago and our monthly payment only went up by a couple hundred dollars but our payoff date jumped forward 12 years.

That said, particularly in this era of low interest rates on investments and uncertain markets, I am a big fan of paying off compounding interest since the rate of return is guaranteed.


Depends on the rate you are paying on the mortgage.    

There's an argument that in an environment where rates could increase, (remembering that mortgage interest is tax deductible) that you might want to pay down your mortgage as slowly as possible.  


Not going to advise you, but some things to consider:

Your mortgage is one of the few tax advantaged pieces of debt you can have. At current rates, after deductions, your all in rate is probably close to 3 percent.

You also, by carrying mortgage debt, levering yourself to inflation, which increases home values. Example- 50% equity on a $500,000 house- housing price goes up 10%. Now worth $550,000- but on your capital you're up 20%. If you held outright you'd be up 10%.

Meanwhile, you take the $250k you would have used to pay it down and get it tax sheltered, or at least advantaged, in an IRA (I know I know, contribution limits, this is for point of illustration). Heck, even in a non sheltered account, you're able to invest it and seems return over time that is higher than your net carrying cost (3%) on the house. 

Finally- by holding the cash and investing it in stocks or bonds you maintain much better liquidity should something major happen in your life or in the housing market. 

Just some things to think about.


Klinker said:

If you have a 30 year mortgage you might look into refinancing as a 15 year mortgage, especially now before the Fed raises rates. We did this a year or two ago and our monthly payment only went up by a couple hundred dollars but our payoff date jumped forward 12 years.

That said, particularly in this era of low interest rates on investments and uncertain markets, I am a big fan of paying off compounding interest since the rate of return is guaranteed.

Thank you - I'll look into switching to a 15-year... do you recall what fees the bank charged? 


SO_Dad said:

Depends on the rate you are paying on the mortgage.    

There's an argument that in an environment where rates could increase, (remembering that mortgage interest is tax deductible) that you might want to pay down your mortgage as slowly as possible.  

Thanks - it's 4%, 30-year. I had forgotten about the tax deduction. 


switching to a 15 year mortgage should save you 1% per year. On a large mortgage, that is significant.


Seems a no-brainer.  You are much better borrowing at a tax deductible 4% and plowing money into a tax-deferred IRA, even if your IRA investments only make a meager return each year (which will then keep compounding year over year with no tax implications until retirement).

bat_chain said:
SO_Dad said:

Depends on the rate you are paying on the mortgage.    

There's an argument that in an environment where rates could increase, (remembering that mortgage interest is tax deductible) that you might want to pay down your mortgage as slowly as possible.  

Thanks - it's 4%, 30-year. I had forgotten about the tax deduction. 

lanky said:

Seems a no-brainer.  You are much better borrowing at a tax deductible 4% and plowing money into a tax-deferred IRA, even if your IRA investments only make a meager return each year (which will then keep compounding year over year with no tax implications until retirement).
bat_chain said:
SO_Dad said:

Depends on the rate you are paying on the mortgage.    

There's an argument that in an environment where rates could increase, (remembering that mortgage interest is tax deductible) that you might want to pay down your mortgage as slowly as possible.  

Thanks - it's 4%, 30-year. I had forgotten about the tax deduction. 

Thank you - not sure I'll be "plowing money" anytime soon, but that's something to aspire to! 


Yes, tax considerations are important - both the tax deductibility of the mortgage interest and the IRA contribution limits (if applicable).  We elected to keep our mortgage, but we did refi to a 15-year loan (about 13 years ago, so we're almost done.)

Good luck!


I would echo the comments above that favor IRA investment over early repayment of a home mortgage.  This also preserves liquidity, which is self-insurance for severe emergencies.  But more importantly, when the IRA is a Roth IRA - the opportunity to save and compound money completely tax free over potentially 30-40 years is huge.

If large amounts are involved, ask a financial planner to spend an hour with you exploring all the gory details...


This is really helpful, thanks all. It appears the refi to 15-year is the way to go along with IRA contributions. Love this board! 


Over the past 18 years of owning our home, we refinanced to 20 and then to 15 years. One time the bank charged nothing for the refinance since they wanted the business. Interest rates were falling and rather than lose us to another bank, they contacted us and offered the refinance for free. 

My kids are in college, and though it is not ideal, I have been taking money out of my IRA to pay for their education. Certain early withdrawals are allowed and paying for college is one of them.

Even at this early stage, you might go to the financial aid website and crunch some scenarios into the online calculator to see how what your expected family contribution (EFC) would be given different scenarios. It's kind of interesting to create the scenarios. For instance, image by the time your child is 17, you have taken 250k dollars and put it into rental property or into an IRA or college funds, etc. See how the calculations play out. If it weren't so serious, it'd be kind of fun.


I bought my house when I was single--met my husband a week later. I had a 30 year mortgage which I converted to a 15 year when I put him on the deed (in 2002). We also took some money out to do some work around the house. Long story short, my husband passed away. I finished paying of the mortgage after 19 years of "ownership."

I tell this story not for sympathy or praise, but to say that somehow, my "extra" money just seems to disappear. They do say that your lifestyle increases to match your income... Although I don't see it, it might be so in subller ways.


lisat said:

Over the past 18 years of owning our home, we refinanced to 20 and then to 15 years. One time the bank charged nothing for the refinance since they wanted the business. Interest rates were falling and rather than lose us to another bank, they contacted us and offered the refinance for free. 

My kids are in college, and though it is not ideal, I have been taking money out of my IRA to pay for their education. Certain early withdrawals are allowed and paying for college is one of them.

Even at this early stage, you might go to the financial aid website and crunch some scenarios into the online calculator to see how what your expected family contribution (EFC) would be given different scenarios. It's kind of interesting to create the scenarios. For instance, image by the time your child is 17, you have taken 250k dollars and put it into rental property or into an IRA or college funds, etc. See how the calculations play out. If it weren't so serious, it'd be kind of fun.

Thanks for this! 


marylago said:

They do say that your lifestyle increases to match your income...

One way to try to manage this a little bit is to put a significant portion of any increase into a percentage increase on your regular retirement and/or education savings deposits BEFORE you get used to it. Ideally this happens via payroll withholding before you even get the paycheck.  I haven't always followed this discipline, but often ... I would get the first newly increased paycheck in total and splurge a little, but then I would adjust the withholding for the 401k to put most of it back in. 


Never let extra money get into your hot little hand.


If your investment will on average return more than the interest you are paying on your mortgage you are better off investing the money. At these low rates, you are likely much better off investing than paying off unless you have a very high interest rate on your mortgage in which case you should refinance immediately. Also consider a biweekly payment instead of monthly if you do decide to refinance your mortgage into a 15yr. It saves you additional interest. 


If you can get a material break on the interest rate by switching to a 15-year loan, with low or no fees, that sounds good.  Otherwise, you can DIY convert your loan to a shorter period just by paying an extra $xx per month toward principal, or by making an extra payment each year.  This leaves you with the flexibility to revert to the 30-year schedule if needed.

Local radio financial advice guy here in Wis is much in favor of continuing to carry the loan, if the interest rate is favorable, as a hedge against emergency.  In case of catastrophe, when it might be difficult/impossible to get a loan, you would have cash/investments of the money you would otherwise have paid into the current loan, and would only have to come up with the payment each month, instead of a big sum to cover whatever the catastrophe is.  Not so important for someone who already has substantial savings.

Some also advise that it's best to fund your retirement before funding college, if it has to be one or the other, since "you can borrow for college (or tap "extra" retirement funds), but you can't borrow for retirement."

(just a couple of thoughts from a person who, in my heart, longs to be debt-free, for the comfort of it)



Agree that you should keep a mortgage. Interest rates are so low. Also, consider this: When you apply for financial aid for college, if you own your house outright you will have more in assets that will be counted against you (for those colleges that consider assets). Most likely, many of the more competitive colleges would expect you to take out a home equity loan if you own your house outright. They ask you the value of your home and how much equity you have. They would consider your house a piggy bank.


Totally agree. But do keep in mind that we're talking average long-term return.

pmartinezv said:

If your investment will on average return more than the interest you are paying on your mortgage you are better off investing the money. At these low rates, you are likely much better off investing than paying off unless you have a very high interest rate on your mortgage in which case you should refinance immediately. 

krugle1 said:

Never let extra money get into your hot little hand.

Well, things were a little tight prior to that and I am putting away close to the max for retirement...


I've wrestled with this question and concluded that it doesn't have to be an "either/or"  situation. Each month put a little more money into your mortgage and a little more into your IRA or employer match, if available.  



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