Hi Terry,

I cant seem to get an honest answer on this question because everyone I ask has their own motivations. I am trying to decide between paying off my house or investing in the market and my children’s’ 529 plans. I am 50 years old making a good living and have been able to save fairly well. I max out my 401K every year and I put away something every month for in each of my 3 children’s 529 plan. I always keep more than a good cushion of liquid savings in case of an emergency (1.5 years). I expect to be coming into an unusually significant amount of income this year and am trying to decide how best to put it to use. I have always wanted to pay off my house but I’m not sure if that is the best idea. I am interested in your thoughts. Thank you!

Terry Says:   OK,   I’m with you in your desire to pay off your home — and I would certainly recommend doing so before retirement — BUT, you can now refinance to a 15 year mortgage at rates well under 4 percent for 15 years.  That strategy would require you to pay more on a monthly basis than a 30-year mortgage, but you’ll still have your mortgage interest deduction to offset some of that expected future income.  And it will get you to your goal to a pre-retirement payoff.

In the meantime, money in a 529 plan can grow tax-free for college.  And I have no idea how old your children are, but this is going to be a very big bill with three children.  (If they get scholarships or other financial aid, you can always use the money for one of the other children.)  Do a projection of how much you’ll need in a few years to educate your children.  Having the money for that is a great investment!

It sounds like you’re doing a great job of managing your money, building a savings cushion.  Having a windfall can be tempting in many ways, but stick to your plan, build your investments even outside your retirement plan, and make sure you have enough set aside for college.   And if the year after this one you get another windfall, write back and maybe that would be the time to pay off the mortgage!

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