Settle the argument: Max out Retirement or Pay off house?

we have to know the interest rate first on the mortgage

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Me and my buddy were diagreeing. He said he'd rather put his extra cash to paying off his house to combat the amortizing interest.

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In a 30, maybe - because that does add up.

You can probably make more off the money in either case, because of the low current interest, but I'm a debt-free advocate for anything other than a pure business loan generating a profit.

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He said a guy he knew paid his house off first, then starting maxing his retirement accounts.

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The A/B would be the opportunity cost (loss) of the retirement contributions versus the interest (not capital) savings.

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What's the MB consensus??

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From a pure dollars and cents analysis, maxing out the Roth (as long as you don't do anything silly with the money - I mean solid dividend stocks, or low-to-medium risk indices) is probably going to net more on the balance sheet.

But, I also say - your ability to handle debt service is based on assumptions you have no way of validating until it is too late, typically. Even if you're the boss, you can't dictate what your business is going to be like in 3, 5, 15, 30 years - so, you cannot be hurt by interest you don't pay on money you don't borrow - that may seem simplistic and the min/maxers will scoff, but it is true, nonetheless.

This is a question of, "What do you value more, high earnings potential or financial security?"


If you want to be financially flexible and able to adapt easily and quickly to changing financial situations, being debt averse is preferred.


If you want to maximize your return and risk that your financial position will at worst be maintained, maxing out your roth is preferred.



You ensure you are always comfortable and stress free with option 1.

With option 2, you get "rich" but also expose yourself to major losses

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Depends on where you are in the stages of your home loan. First 5-10 yrs, I'd probably pay on the house because it's all going to interest......

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Saving future interest does not equate to making money. Investing in an asset that increases in value over time makes money.

Paying extra principal reduces the cash in your pocket to invest anywhere else and also reduces the largest tax break most people have. The rate of return on home equity will always be zero.

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if you want to be financially flexible and able to adapt easily and quickly to changing financial situations, being debt averse is preferred.

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Flexibility is available to those with liquidity, not those who put cash into illiquid assets, like home equity.

If you lose your job, get disabled temporarily or encounter a great investment opportunity, owing less on your house will not help you.

The only way to get access to home equity is to sell your house or pay interest to borrow against it. Good luck getting a home equity loan when you have no job to meet your short term needs.

It would be far better to put extra principal in a taxable account, invested in anything but dirt, for liquidity. You can label it "mortgage payoff fund" if you like, but you can access it for short term needs or medium term investment goals over the life of the mortgage.

There's good debt and bad debt.

The "right" decision is investing in 401k accounts. You should be making ~5% real returns (adjusted for inflation.

If your house not is at 4.5%, it's really probably closer to 3.5% after tax benefits. And assuming average 3% inflation (same thing I assumed for the real returns in a 401k), your real cost to borrow is 0.5%. Ask yourself this question: would you be willing to invest money in a note that guaranteed you a 0.5% inflation adjusted return for 30 years?

Also, debt amortizes, not interest. Interest compounds. He's talking way out of his league.

Nvm, didn't see the edit.