Pay Mortgage Early or Increase Emergency Fund

[spikedup]

Another option not mentioned yet is to refi your mortage into a 15 year loan. Current rates are in the low 3's.

[Anonymous]

Just a couple questions...

How old are you, how far into the mortgage are you. What tax bracket do you fall into. You can at least get a vague idea of the event horizon for the tax implications/ benefits by running a morgage calculator with amortization tables. At some point in th mortgage the tax benefits of the interest deduction become significantly less valuable unless you have a good number of other deductions to itemize.

Also, how long do you plan to stay in the house, will you upsize (starting a family) or downsize (retirement) when you leave the house or is this a forever house.

On a personal level, will you sleep better at night knowing you only have taxes insurance and utilities to pay. I don't want to unduly complicate the situation, but your individual circumstances play a big role in this decision. Also your definition of liquid assets for your emergency fund play a role, are they sitting in a savings account earning less than 1 percent?

[Anonymous]

Hello pfarro1! Thank you for your time to help me I could really use some expert people here ! 31, bought the house late last year, tax bracket is 25%. Planning to stay for 10 years or more then will downsize since it will just be us two by then. Unfortunately, most of our savings are indeed sleeping in less than 1%. We recently moved our Roth to Mutual Funds but the rest of our 6 month e fund is sitting either in term deposit or just regular savings.

[Anonymous]

I work at night, so im getting ready to head out. I will play around a bit with some calculators when i get home. What was the purchase price and loan amount? Just on a simple thought, to me i would probably pay down more on the note right now say split it 600 extra to mortgage 400 to savings. You are relatively young, and are doing your saving for retirement as is. Maybe build up to 9 to 12 months in your emergency account then split it in half and add half to a straight IRA. Repeat that cycle. You are earning solidly over 3% by paying down early at this point which is not an awe inspiring return, but solid, and known. If (more like when) rates start to rise you might reconsider the mix. 

At 31 you are well ahead of the game, I dont honestly believe that there is a wrong answer here for you. Personally, I am getting ready to buy a house, should be mid summer. I will make relatively large extra payments as well as I intend my 30 yr note to be paid off in 11. My house is going to be relatively cheap (think 100k) so for me the mortgage deduction may not actually be better than the standard deduction anyway. 

If you want to play around with the tax numbers, just plug your mortgage data into a calculator. Many of the offer an extra payment function. You can see the interest paid (monthly and annually) that number is what you get to subtract from your income for the mortgage interest deduction, BUT only if you itemize your return. The more of the home you own, the less interest you pay and thus the less you can subtract  from your income. At some point unless you have a good amount of other deductions by itemizing it becomes worth it again to just take the standard deduction.