The New Commonsense Guide to Your 401(k): Rebuilding Your Portfolio From The Bottom up

Chapter 67. Your Mortgage

PAYING OFF CREDIT CARD debt is a no-brainer, but what about other kinds of debt? How should you weigh paying down debt vs. tucking extra money away? Although car loans generally carry lower interest rates than credit cards, they, too, should be paid down to prepare for the time you will be living on a lower income. Interest on these loans is not tax deductible, so you carry the full cost of it.

Paying off mortgage debt is more controversial. Many investors have argued that they can get a better return on their money by investing in the stock market rather than in their own mortgage, especially if they carry a low interest rate such as 5 percent on a fixed-rate loan. Yet most financial advisors suggest that clients pay off their home before they leave their jobs.

Paying off the mortgage isn't a new idea. It has its roots in the debt aversion fostered in the Great Depression. Many Americans who went through the Depression vowed they would never owe money again. But the debt free movement also has a modern missionary in Marc Eisenson, author of The Banker's Secret. In the book, Eisenson argues that by prepaying you are actually "investing in your mortgage," earning a return of whatever your interest rate happens to be.

Eisenson's book, which is composed chiefly of tables illustrating the effect of prepayments, shows, for example, that a homeowner who shells out an additional $200 a month shaves $153,414 in interest and six years off a $350,000, 30 year mortgage ...