Pay down mortgage, pay down school loans, or invest?

[mjr2444]

I think a common question for a lot of people. I'm 35.....in the process of having a house built (I move in June). House has been appraised at $443k and in June, the mortgage will only be $259k (so I'll have at least $180k equity). I am on a 10 year ARM at 3.75%.

School loans, $135k worth of them at 4.625% (I consolidated)...graduated law school but not using the degree. Payment is about $550 a month but will eventually raise up to $1,300 at the highest point in maybe 15 years. Swear I've been paying this loan off for 5 years and taken maybe $500 off the principle due to all the accumulated interest from when I was in school (thus, it's going to take 25 years to pay this off). I would probably like to practice one day....but I've been running a successful business since I was 23 and have kind of gone with it (make about $150-200k per year). I have about $125k in pre-tax retirement accounts. No credit card debt. Have about $65k in bank....I guess my "emergency fund" if you will.

Trying to figure out what to do....I normally fund my retirement as much as I can per year with pre-tax dollars (been doing about $34k per year). I normally have a good $30k savings at end of year from business (and this is what I am wondering what to do with).

Personally......I think I'd rather put that extra $30k or whatever is left at end of year towards the mortgage principle. I'd love to be able to get the house paid off within the 10 years because I'm sure interest rates will be way higher in 10 years than 3.75%. Plus, once the house is paid...it's mine....no worries about losing it. Business has been good for 10 years, but you never know....businesses go in and out of business all the time. I just feel the school loans are number 3 on the list....because the loan is unsecured (meaning if something happens and I can't pay them....at worst, my credit goes to hell and maybe they put a lien on house). I'm self-employed so they really can't garnish wages. However, if something happens and I can't pay the mortgage, they take the house. Big difference. I expect the house to always be worth at least $450-500k based on where I live and the housing market here. I just see putting the money into the mortgage as money in the bank and a safe bet.

As for retirement....I am already putting $30k in per year....so I don't look at investing post-tax dollars as much of a priority versus if I didn't have the $30k I already contribute.

Thoughts? I'm just looking at worst-case scenarios (because I feel people should when they are dealing with this type of money).

[Anonymous]

You seem to have thought everything out very well.

A real advantage to paying down the mortgage is that it sounds like it would make you feel better.  And being able to feel good about what you are doing with your money is hard to overrate.  If you have two choices, A and B, and both are rational, go with A if it has the added benefit of making you sleep better at night, even if you think there is a slight edge to B in terms of pure logic. 

I have a personal preference for going really top heavy into retirement investing.  So since you honestly are soliciting feedback on that -- your subject line seems to indicate an openness to hearing someone make a case for that as a third use for the extra 30k -- I'll stand in for Jack Bogle.

You mention that you are putting aside 30k right now into retirement.  That is, however, pre-tax money, which means that all of your money will be taxed when you begin withdrawing it after you retire.  You may want to consider a Roth option, which has advantages for young people.  Another option, even if you stay with a pure tax deferred approach, is that you could also put more than 30k in.  (You seem to be thinking that 30k is the maximum you can put into tax-defered retirement accounts, but self-employed people can put in a lot more than that.)

Bear in mind too that self-employed people have a far greater need to put away large sums into retirement, since they will have no one paying them any kind of pension when they retire.

Finally there are legitimate questions about how much a person now in his 30s can rely on social security and other mechanisms to take care of him 30 or 40 years from now.  Yes they will probably be there, but not certainly, and what is probable is that they will be less beneficial than they are now to current retirees.

These are just some thoughts.  There is no right answer and you can certainly do a combination of them.  For example, you could put some of your excess money into paying down the mortgage and some into retirement.  Even if the mortgage is not fully paid off in ten years, much of it will be, so a possibly higher interest rate may not mean much when the principal is so much smaller.

[takeshi74]

Running some scenarios would probably help you in your decision.  Do you think you'd be able to earn more investing versus paying down your mortgage and avoiding the interest rate hikes you're expecting?  Can your investments earn more than the interest that your student loans would accrue?  These aren't the only considerations but the'yre something to look at while making your decisions.

[Anonymous]

Pay down the mortgage.  The mortgage is also an investment.  And there is nothing like being debt-free-  That is what I'd do if I were in your shoes.