Reply to What Should I do? Aggressively payoff Home Mortgage or Invest the Money in a Mutual Fund??

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[quote=Anonymous]I have been trying to figure out what we should do as a family.  I have been listening to Dave Ramsey's podcast.  He has these Seven Baby Steps:

1.  Emergency Fund of $1000

2.  Pay off all debt using the Debt Snowball

3.  3 to 6 months of expenses in savings

4.  Invest 15% of household income into Roth IRAs and pre-tax retirement

5.  College funding for children (about 15% of income recommended)

6.  Pay off your house early

7.  Build wealth and give!

So I am past Baby Step #5 (college funding for children).

We are a household with approximately HHI of $200K.  We own a rental property and a house.  We have approximately $600k in retirement and $60k in a 529 plan for both kids.  In addition, we have about $160k in stocks and $60k in cash.

So per Dave Ramsey's steps, we should be planning to pay off our mortage as quickly as possible.  However, the interest rate on the mortgage is quite low.  In addition, by paying off the mortgage early, I lose the deduction for tax purposes, which would then increase my taxable income.  Doing an analysis, it would cost me approximately $3,000 extra in taxes along between paid off mortgage and not a paid off mortgage.  Also it would increase my AMT tax.

However, instead of putting the money into paying off the house early, we could just use the money and put it in a mutual fund (ie Vanguard 500 index fund) and get a return of more than what the bank is charging for our interest.

What would you recommend?  If it matters we live in Virginia.  I am hoping that the kids will attend the numerous state schools in VA.  They are both 11 year old.  So there is time but not that much time for both the kids.

Would love to hear your feedbacks.  I know that our 529 amount is not that high.  But I have since increase our contribution for each kid to about $700 per month.  So now we have approximately $2500 extra to use to either decrease the mortgage or increase our financial investment.

The other option is that if I should pay down the mortgage faster, I can also sell some of the mutual funds to decrease my loan amount.  If it matters, the loan amount is $350k.

thank you[/quote]

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