Is it Worth it to Make Double Payments on My 4.75% 30-Year Mortgage

Disclaimer: I’m a 26 year old guy who does not own property, does not have children, and is currently unemployed and in need of a shower. So now that I’ve presented you with my impressive credentials, let’s proceed with the financial advice. (Isn’t the internet great?)

The book “A Random Walk Down Wall Street” provides a general rule of thumb for deciding between investing and paying off debt (with a long term perspective in mind). The rule says that if the debt interest rate is:

  •   <4%, then invest in the market. (Low cost broad based index funds, of course)
  •   5-6%, then it’s a tossup. Let your personal risk tolerance decide.
  •   7+% then pay off your debt.

Even with your interest rate being on the lower side of the range, the best choice is still not an obvious one.  Paying off a mortgage sometimes has less to do with math and more to do with peace of mind. In any case, I would advise you to take advantage of any special opportunities or tax advantaged investments before doing anything else. This includes employer 401k matching, Roth IRA, and your children’s 529 plan.

After that I would personally choose to devote discretionary resources to paying off the mortgage, before investing further.  I like to maintain a debt free lifestyle and keep my expenses low. So I’m not keen on the idea of spending a bunch of money in an attempt to get a small percentage of it back as a tax break. Anyway I’m pretty sure that you have to have a significant amount of debt to actually benefit from an itemized deduction rather than a standard one.

The nature of investments is that they occasionally get slammed, when that happens it will be nice to have a paid off house so you can still sleep at night (because you’ll have a place to sleep at night). As Dave Ramsey says, “If your house was paid off, would you take out a loan against it in order to invest?” Not likely.

If you are really concerned about making the most of your time and money, then I’d focus on that $50,000 tied up in the rental home. What is going on there?

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