Should I Be Bringing Down the House Payment?

Question: My wife and I have no children and a modest lifestyle. We pay off our credit cards every month, and we bought our equally modest cars in cash (a no-frills Toyota pickup and a Chevy Malibu).

So what could possibly be our problem? We fight over money — not over the money we don’t have, but the money we do. I want to make an extra payment on my mortgage, while she says she’d rather put it in a savings account. I say we’ll save more in the long run, but she doesn’t like the idea of paying any more than we have to.

Who’s right? Me or her?

— Michael in Miami

Howard Dvorkin CPA answers…

First of all, congratulations on living within your means. That’s not easy these days, with a constant barrage of credit card offers in the mail, as well as TV commercials trying to convince you to buy things you don’t need.

Second, you should know that your problem is not unique. In almost three decades of counseling couples, I’ve witnessed many fights about money. But these should never be personal. It should be about the math. Let’s look at your math.

What you pay, what you earn

You told me separately that your mortgage interest rate is a very enviable 4.35 percent. You also have a money market account that earns a paltry 0.8 percent. So right away, you can tell your wife: If you pay down your mortgage faster, you’ll save much more on interest payments than you’ll earn in interest — almost six times more.

Exceptions to the rule

When it comes to saving money, however, nothing is quite that simple. Here are four questions to ask yourselves before you pay a mortgage off early:

1. Do you have student loans? If those loans have higher interest rates than your mortgage, pay those down first. But if you’ve consolidated your student loans and the monthly payment is less than the mortgage, go ahead.

2. Do you plan to move soon? If so, you may need that extra cash for a new down payment and moving expenses.

3. Are you saving for retirement? You can earn much more than your mortgage on even modest retirement plans like the 401(k)s, Roth IRAs, and the new MyRA, which all come with significant tax breaks. (A separate but related issue: I always advise couples to pay off their mortgage before they retire.)

4. Do you have an emergency fund? This is perhaps the most important question you can ask yourselves. It makes no sense to pay down a mortgage when you don’t have enough for unexpected developments. As I wrote in my book Power Up, “The rule of thumb about an emergency fund is to accumulate at least six months of your household expenses. This is a nice theory, but it falls short in practicality.” So even 1-2 months is a notable achievement.

After speaking with you, I learned you have no other debts that outpace your mortgage, and you aren’t planning to move. You said you read my book and have that emergency fund. So my final answer is:

Yes, you’re right, Michael. Make that extra mortgage payment whenever you can.