Your conventional loan is not insured or guaranteed by the government, unlike some other types of mortgage loans, such as those that involve the Department of Veterans Affairs or the Federal Housing Administration. Instead, a conventional loan involves a private lender, such as a bank, that sets the terms and criteria for the loan. But no matter which type of home loan you have, paying it down too fast might detract from your retirement savings.
Mortgage Interest Deduction
You pay interest on your home loan, so most people assume it’s wise to pay down the loan as fast as you can. But that’s not always true. First you must consider how much money you could save by deducting mortgage interest from your taxable income on your yearly income taxes. If you reduce the amount you pay in interest by paying down your conventional loan too quickly, you’re also reducing the amount you can deduct from your taxable income.
Missed Investment Opportunities
Also consider what financial opportunities you lose out on by paying down your loan too fast. For example, suppose your monthly conventional loan payment is $1,000, but you pay $2,000 instead to speed up repayment. That extra $1,000 could have been invested elsewhere, such as in your business, a stock portfolio or a money-market account. The money in that excess mortgage payment could have earned more money as an investment than you saved by reducing your interest liability on the conventional loan. The total profits of such an investment might have been enough to fund your retirement.
Fund Retirement Accounts
Instead of paying extra money toward your mortgage, you could invest the money in a 401(k), individual retirement account or other tax-advantaged retirement account. If your employer offers matching contributions -- meaning it contributes funds that match all or part of your contribution -- you have an even greater incentive to avoid paying down your mortgage too quickly and putting your money in one of these retirement accounts.
It takes a careful analysis to determine whether paying off your conventional loan is robbing you of potential retirement savings. The lower the interest rate on your conventional loan, the more likely it is that paying your loan off quickly will detract from potential retirement savings. But if your mortgage interest rate is high, paying down your debt faster might be a good idea. If you’re not sure, consult an experienced financial planner who can help you find the optimal rate of loan repayment and offer ways to reduce your overall tax burden.
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