I have a saying: “If someone asks you if you want one thing or another, always choose both.” Unfortunately, this advice is not always applicable. When a family is trying to decide the best vehicle for investing their money, they are often presented with the choice of paying down their mortgage or saving for retirement. Let’s examine the benefits and drawbacks of each strategy:

Paying Down the Mortgage First

While it can be tempting to pay down your mortgage towards the end of its length, the greatest advantages are actually realized at the beginning of it. That is when the most of your payment is being applied to interest. Paying down the balance is essentially like earning returns at the interest rate at which your mortgage is set. Complicating the matter is the fact that the interest paid on your home mortgage is tax deductible. Another downside is that you will continue to pay the same monthly payment, even though you have effectively reduced the principal owed and the terms of the mortgage.

For those with non-standard mortgages, though, paying down principal can be an advantage. Building equity in a home that is financed by an adjustable-rate product will make it easier for you to refinance to a fixed-rate mortgage. If people in your area are seeing little or no appreciation of their homes, paying down a mortgage is an especially good way to keep from going underwater (owing more than your home is worth).

Funding Retirement First

There is no doubt that front-loading your retirement savings will vastly increase their value by the time you retire due to the compounding effects of interest. Therefore, it makes more sense to save for retirement at a younger age than it does to pay down a mortgage. The earlier you start, the more time you have to enjoy compound growth, and eventually your Roth IRA will fund itself.

On the downside, the return on retirement savings can fluctuate wildly with the stock market. While the market has always been a good bet in the very long term, we have recently seen periods where returns have been fickle for years. During those times, it can make more sense to pay down a mortgage and receive a reliable rate of return as savings on interest.

Funding Both at Once

Between these two options lies a compromise: Fund your retirement savings while making small additional contributions towards paying down a mortgage. This can be an especially attractive option in the early phases of the mortgage when small contributions can reduce the interest paid. Don’t sacrifice the long-term savings goals of your retirement plan by focusing too much on your mortgage. In fact, balance paying down a mortgage against the return prospects of other, non-retirement savings options. For example, if your mortgage interest rate is above what you can reasonably expect to earn from your non-retirement investments, paying it down can be advantageous.


Having to make the decision to pay down a mortgage (or other debt) or to contribute additional funding to retirement is an extremely important and complex decision. By prioritizing your retirement-savings goals first, you can then decide if any additional savings are best spent on further contributions to your mortgage or on other investments.

Jason D. Steele is personal finance writer and a consumer advocate. He specializes in helping people eliminate credit card debt and maximize rewards.


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