Should I pay off my mortgage, begin retirement savings, or build my emergency fund?
"Welcome to Money.SE. I will say upfront, Personal Finance is just that, personal, and you are likely to get multiple, perhaps conflicting, answers. Are you sure the PMI will drop off after 2 years? The rules are specific, and for PMI, when prepayments put you at that 78/80% LTV, your bank can require an appraisal, not automatically drop it. Talk to the banks, get confirmation, and depending what they say, keep hacking away at the mortgage.  After this, I suggest jumping on Roth IRAs. You are in the 15% bracket, and the Roth will let you deposit $5500 for each you and your wife. A great way to kickstart a higher level of retirement savings.  After this, I'm not comfortable with the emergency savings level. If you lose your job tomorrow (Funny story, my wife and I lost our's on the same day 3 years ago) and don't have enough savings (Our retirement accounts were good to just retire that day) you can easily run out of money and be late on the mortgage. It's great to prepay the mortgage to get rid of that PMI, but once there, I'd do the Roth and then focus on savings. 6 months expenses minimum.  We have a great Q&A here titled Oversimplify it for me: the correct order of investing in which I go in to more detail, as do 4 other members.  I am not getting on the ""investments will return more than your mortgage cost"" soapbox. A well-funded emergency fund is a very conservative bit of advice. With no matched 401(k), I suggest a balance of the Roth savings and prepayments.  From another great post, Ideal net worth by age X? Need comparison references you should have nearly 1 year's salary (90K) saved toward retirement.  Any question on my advice, add a comment and I will edit in more details."
It depends on the relative rates and relative risk. Ignore the deduction. You want to compare the rates of the investment and the mortgage, either both after-tax or both before-tax. Your mortgage costs you 5% (a bit less after-tax), and prepayments effectively yield a guaranteed 5% return. If you can earn more than that in your IRA with a risk-free investment, invest. If you can earn more than that in your IRA while taking on a degree of risk that you are comfortable with, invest. If not, pay down your mortgage. See this article: Mortgage Prepayment as Investment: For example, the borrower with a 6% mortgage who has excess cash flow would do well to use it to pay down the mortgage balance if the alternative is investment in assets that yield 2%. But if two years down the road the same assets yield 7%, the borrower can stop allocating excess cash flow to the mortgage and start accumulating financial assets. Note that he's not comparing the relative risk of the investments. Paying down your mortgage has a guaranteed return. You're talking about CDs, which are low risk, so your comparison is simple. If your alternative investment is stocks, then there's an element of risk that it won't earn enough to outpace the mortgage cost. Update: hopefully this example makes it clearer: For example, lets compare investing $100,000 in repayment of a 6% mortgage with investing it in a fund that pays 5% before-tax, and taxes are deferred for 10 years. For the mortgage, we enter 10 years for the period, 3.6% (if that is the applicable rate) for the after tax return, $100,000 as the present value, and we obtain a future value of $142,429. For the alternative investment, we do the same except we enter 5% as the return, and we get a future value of $162,889. However, taxes are now due on the $62,889 of interest, which reduces the future value to $137,734. The mortgage repayment does a little better. So if your marginal tax rate is 30%, you have $10k extra cash to do something with right now, mortgage rate is 5%, IRA CD APY is 1%, and assuming retirement in 30 years: If you want to plug it into a spreadsheet, the formula to use is (substitute your own values): (Note the minus sign before the cash amount.) Make sure you use after tax rates for both so that you're comparing apples to apples. Then multiply your IRA amount by (1-taxrate) to get the value after you pay future taxes on IRA withdrawals. You can't max out your retirement savings. There are vehicles that aren't tax-advantaged that you can fund after you've exhausted the tax-advantaged ones.  Consider how much you want to put into these vehicles.  There are disadvantages as well as advantages.  The rules on these can change at any time and can make it harder for you to get your money out. How's your liquid (cash) emergency fund?  It sounds like you're in a position to amass a good one.  Don't miss this opportunity. Save like crazy while you can.  Kids make this harder. Paying down your mortgage will save you interest, of course, but make sure you're not cash-poor as a result.  If something happens to your income(s), the bank will still foreclose on you even if you only owe $15,000.  A cash cushion buys you time. "Well.... If you have alllll your money invested, and then there's a financial crisis, and there's a personal crisis at the same time (e.g. you lose your job) then you're in big trouble. You might not have enough money to cover your bills while you find a new job. You could lose your house, ruin your credit, or something icky like that.  Think 2008. Even if there's not a financial crisis, if the money is in a tax-sheltered retirement account then withdrawing it will incur ugly penalities. Now, after you've got an emergency fund established, things are different. If you could probably ride out six to twelve months with your general-purpose savings, then with the money you are investing for the long term (retirement) there's no reason you shouldn't invest 100% of the money in stocks. The difference is that you're not going to come back for that money in 6 months, you're going to come back for it in 40 years. As for retirement savings over the long term, though, I don't think it's a good idea to think of your money in those terms. If you ever lose 100% of your money on the stock market while you've invested in diversified instruments like S&P500 index funds, you're probably screwed one way or another because that represents the core industrial base of the US economy, and you'll have better things to worry about, like looking for a used shotgun. Myself, I prefer to give the suggestion ""don't invest any money in stocks if you're going to need to take it out in the next 5 years or so"" because you generally shouldn't be worried about a 100% loss of all the money in stocks your retirement accounts nearly so much as you should be worried about weathering large, medium-term setbacks, like the dot-com bubble crash and the 2008 financial crisis. I save the ""don't invest money unless you can afford to lose it all"" advice for highly speculative instruments like gold futures or social-media IPOs. Remember also that while you might lose a lot of your money on the stock market, your savings accounts and bonds will earn you pathetic amounts by comparison, which you will slowly lose to inflation. If you've had your money invested for decades then even during a crash you may still be coming out ahead relative to bonds." The main reason for paying your mortgage off quickly is to reduce risk should a crisis happen.  If you don't have a house payment, you have much higher cash flow every month, and your day-to-day living expenses are much lower, so if an illness or job loss happens, you'll be in a much better position to handle it. You should have a good emergency fund in place before throwing extra money at the mortgage so that you can cover the bigger surprises that come along. There is the argument that paying off your mortgage ties up cash that could be used for other things, but you need to be honest with yourself: would you really invest that money at a high enough rate of return to make up your mortgage interest rate after taxes?  Or would you spend it on other things?  If you do invest it, how certain are you of that rate of return?  Paying off the mortgage saves you your mortgage interest rate guaranteed. Finally, there is the more intangible aspect of what it feels like to be completely debt free with no payments whatsoever.  That feeling can be a game-changer for people, and it can free you up to do things that you could never do when you're saddled with a mortgage payment every month. I'm assuming you're in Germany or Europe based on your question, but here's an American's perspective that should pertain you you as well: Once you have a steady income and an emergency fund large enough to keep you from going bankrupt, then start learning about retirement and investment options. I'd suggest you put only 20% down if you qualify for the 80% amount of the mortgage. Live in the house a year and see what expenses really are. Then if your non-Ret accounts are still being funded to your liking, start prepaying the mortgage if you wish.  It's great to start with a house that's only 50% mortgaged, but if any life change happens to you, it may be tough to borrow it back. Far easier to just take your time and not make a decision you may regret. You don't give much detail about your retirement savings, but I'd suggest that I'd rather have a large mortgage and fund my retirement accounts to the maximum than to have a paid house and start the retirement account at age 35. Some choose that option. I would apply extra cash left over at the end of the month as follows, in order of priority: Realize, though, that this is my take on priority. My experience has been that a liquidity crisis is much more stressful than having a mortgage or other debt -- illiquid wealth is almost useless when you need cash. So if you still have strong feelings about retiring that debt after considering the liquidity issue, go ahead and swap #3 and #4 above. Make plans to pay off the mortgage over the next 10 years. Find a mortgage payoff calculator and make extra monthly payments that keep you on a 10 year schedule. I'd strongly suggest making sure your retirement savings are on track, though. Time is on your side here, and your required monthly contribution will be low now while you're still in your 20s. Here is something that should help your decision: Currently you are 57, suppose that means that you will still work for 10 years, and then be retired for another 20 before you sell the house. Your retirement account is nearly flat, so you will have to support yourself with your own income.  If there are no surprises, you and your wife could expect to earn 1.16 million over the  next 10 years. There will be interest on your savings, but also inflation, so to simplify I will ignore both. That means you will have an average of 40k (gross?) per year available to live from during the next 30 years. If you get a mortgage where you only pay nett 3% interest (no payback of the loan), that would cost you 6k per year on interest (based on 350k-150k), if you also want to pay back the 200k difference within 30 years, it would totally be close to 13k in annual interest+payback. Now consider whether you would rather live on 40k per year in your current place, or on a lower amount in a bigger place. Personally I would not choose to make a 200k investment at this point, perhaps after trying to live on a budget for a while. (This has the additional benefit that you can even build some cash reserve before buying anything.) So if I understand your plan right, this will be your situation after the house is bought: Total Debt: 645,000 Here's what I would do: Wait until your house sells before buying a new one.  That way you can take the equity from that sale and apply it towards the down payment rather than taking a loan on your retirement account.   If something happens and your house doesn't sell for as mush as you think it will, you'll lose out on the gains from the amount you borrow, which will more than offset the interest you are paying yourself. AT WORST, pay off the 401(k) loan the instant your sale closes. Take as much of the remaining equity as you can and start paying down student loans.  There are several reasons why they are a higher priority than a mortgage - some are mathematical, some are not. Should I look to pay off student loans sooner (even if I refi at a lower rate of 3.5% or so), or the mortgage earlier ...   My thoughts are that the student loans follow me for life, but I can always sell and buy another home So you want this baggage for the rest of your life?  How liberating will it be when you get that off your back?  How much investing are you missing out on because of student loan payments?  What happens if you get lose your license?  What if you become disabled?  Student loans are not bankruptable, but you can always sell the asset behind a mortgage or car loan.  They are worse than credit card debt in that sense.  You have no tangible asset behind it and no option for forgiveness (unless you decide to practice in a high-need area, but I don't get the sense that that's your path). The difference in interest is generally only a few payment' worth over 15 years. Is the interest amortized the same as a 15 year if I pay a 30 year mortgage in 15 years?  Yes, however the temptation to just pay it off over 30 years is still there.  How often will you decide that a bigger car payment, or a vacation, or something else is more important?  With a 15-year note you lock in a plan and stick to it. Some other options: Lets do the math, using your numbers. We start off with $100K, a desire to buy a house and invest, and 30 years to do it.  Scenario #1 We buy a house for $100K mortgage at 5% interest over 30 years. Monthly payment ends up being $536.82/month. We then take the $100K we still have and invest it in stocks, earning an average of 9% annually and paying 15% taxes.  Scenario #2 We buy a house for our $100K cash, and then, every month, we invest the $536.82 we would have paid for the mortgage. Again, investments make 9% annually long term, and we pay 15% taxes.  How would it look in 30 years?  Scenario #1 Results: 30 years later we would have a paid off house and $912,895 in investments Scenario #2 Results: 30 years later we would have a paid off house and $712,745 in investments Conclusion: NOT paying off your mortgage early results in an additional $200,120 in networth after 30 years. That's 28% more. Therefore, not paying off your mortgage is the superior scenario.  Caveats/Notes/Things to consider Play with the numbers yourself: Here's what I'd do.  Show these figures to your bank, and ask if they can offer you some type of account with a small overdraft, say up to $2000.  Typically this won't pay the same kind of interest as your savings account, but it doesn't matter. If such an account is available, then yes, dump most of your savings into the student loan, and keep a few hundred in your new account.  The overdraft on this account is your emergency fund.  This means that in the more likely scenario (no emergencies) you're saving yourself 6% interest on something like $4000 to $4500.  In the case of an emergency, you're still covered; but you'll be paying a larger amount of interest.  Let's say you have an emergency cost and need to dip into the overdraft for $1000.  If the interest is 15%, then you've cost yourself an extra 9% on that $1000 over leaving that debt in the student loan.  This seems to me like a really good gamble - more likely to gain 6% of $4000, less likely to lose 9% of $1000. If your bank won't give you a low-interest account with a small overdraft, then use your credit card as your emergency fund.  The same kind of logic applies; but since credit card interest rates are typically higher than overdraft interest rates, you'll want to keep slightly more in your savings account.  About $1200 to $1500 feels right to me; and move the remaining $3500 to $3800 to your student loan.   So yes, pay off the student loan.  That 6% interest really is worth having, even if you'd be taking a small gamble. Edit - Alexander Kosubek has suggested that I should compare this to matched retirement plans.  The 100% gain in a matched retirement plan isn't 100% per annum; it's 100% divided across the length of time you have to wait until you can get your hands on that money.  Suppose the money is accessible when you turn 60 - a matched plan is a good deal if you're in your 50's, but not so good if you're in your 20's.  The 100% matching is equivalent to 6% interest per annum compounded over slightly under 12 years.   So if you're less than 12 years away from retiring, go for the matched plan.  Otherwise, pay off your student loan first. You've got a great emergency fund built up and no credit card debt. That's something to be proud of. If you didn't already have those two things taken care of, that would be your first priority.  If I were in your situation, I would pay off the student loan. Yes, it's a low interest rate, but you've got the opportunity to pay it off completely and eliminate a monthly payment from your life. Take it.  I don't know if you've already contributed to your Roth IRA for this year or not, but I would set aside $11,000 to cover the max contribution to your Roth IRA for this year and next year.  That leaves about $10,000 left. Do you have any money set aside for your next car? If not, allocate most of this money toward your next car. When you need to buy another car, you will be able to pay cash and avoid a car loan. Do you have an emergency fund? If so, one idea is to put money into a Roth IRA, and invest it conservatively (short term government bonds, or a IRA savings account).  Since you can withdraw your contributions from a Roth at any time, this could serve as most of your emergency fund, which means you could then use your existing non-tax-sheltered emergency fund to pay down the loans. This way if an emergency does come up, you have access to the money.  And if an emergency doesn't come up, you have some tax-sheltered funds that you would not otherwise have. Let's look at some of your options: In a savings account, your $40,000 might be earning maybe 0.5%, if you are lucky.  In a year, you'll have earned $200.  On the plus side, you'll have your $40,000 easily accessible to you to pay for moving, closing costs on your new house, etc. If you apply it to your mortgage, you are effectively saving the interest on the amount for the life of the loan.  Let's say that the interest rate on your mortgage is 4%.  If you were staying in the house long-term, this interest would be compounded, but since you are only going to be there for 1 year, this move will save you $1600 in interest this year, which means that when you sell the house and pay off this mortgage, you'll have $1600 extra in your pocket. You said that you don't like to dabble in stocks.  I wouldn't recommend investing in individual stocks anyway.  A stock mutual fund, however, is a great option for investing, but only as a long-term investment.  You should be able to beat your 4% mortgage, but only over the long term.  If you want to have the $40,000 available to you in a year, don't invest in a mutual fund now. I would lean toward option #2, applying the money to the mortgage.  However, there are some other considerations: Do you have any other debts, maybe a car loan, student loan, or a credit card balance?  If so, I would forget everything else and put everything toward one or more of these loans first. Do you have an emergency fund in place, or is this $40,000 all of the cash that you have available to you?  One rule of thumb is that you have 3 to 6 months of expenses set aside in a safe, easily accessible account ready to go if something comes up.   Are you saving for retirement?  If you don't already have retirement savings in place and are adding to it regularly, some of this cash would be a great start to a Roth IRA or something like that, invested in a stock mutual fund. If you are already debt free except for this mortgage, you might want to do some of each: Keep $10,000 in a savings account for an emergency fund (if you don't already have an emergency fund), put $5,000 in a Roth IRA (if you aren't already contributing a satisfactory amount to a retirement account), and apply the rest toward your mortgage. First, i think you're doing awesomely for your age. Here's what i'd do in your situation (disclaimer: These are just my personal opinions from experience with my own finances.): I'd do all those things and partition the money so that i ensure i do them all. That may mean not dollar cost averaging monthly but rather quarterly to keep fees-percentages down, but i think that's reasonable for your age. Something i don't think you should overlook with regard to your mortgage is the freedom afforded you by paying off a home. It provides you with the freedom to be out of work, between work, or take an extended leave without the fear of how to pay your bills, the mortgage tending to be a significant percentage of the monthly bills. If that's not something you've considered, not a concern, or not something you care about, then paying off your home probably isn't a priority so I'd drop that step and put more money into investments.