bank rates

Save More Or Pay Down Your Mortgage?

Here’s a simple formula that can help you decide whether it’s smarter to pay down your mortgage more quickly, or put extra cash in your retirement savings.

Multiply your mortgage rate by 1 minus your tax rate. Compare that return to what you think you can earn with a conservative investment in your employer’s 401(k) plan. Choose the higher one.

Here's a simple formula that can help you decide whether it's smarter to pay down your mortgage more quickly, or put extra cash in your retirement savings.

Example: If your mortgage rate is 5% and your tax rate is 30%, the math is 5 times the difference of 1 minus 0.30 (or 5 times 0.70). The result is 3.5%.

That’s your real mortgage rate when you take the ability to deduct the interest from your taxes into account.

If your retirement plan is offering bond or income funds earning more than 3.5% a year, you should choose retirement investing over prepaying your mortgage.

See how much your retirement savings could grow by increasing your contributions with our 401(k) calculator.

Or, if paying your mortgage down more quickly makes sense, figure out how much you could save with this mortgage calculator.

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Comments (2)
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  1. Justin said:
    on April 17th at 03:21 pm

    What about the fact that you still have to pay taxes on your retirement funds when you’re ready to use them, obviously the amount is different for every person, but even if you’re only going to be in a low tax bracket, you have to take that into account as well… Only estimating the cost of your mortgage after tax deductions is an unfair comparison, you need to estimate the true cost of saving after tax payments.

  2. David said:
    on April 12th at 03:36 pm

    What about the interest you will save by paying down the mortgage?