My wife and I only put 5% down on a new home — now that we’ve got more cash, do we put it all on our mortgage?
Greg and Maya are in their early 30s and recently made a significant financial move: They bought a new $400,000 home, but only put down 5%.
At the time, they hadn’t yet sold their old home — a decision that left them with a $380,000 mortgage at a steep 7.5% interest rate, plus $72 per month in private mortgage insurance (PMI).
Now that the old home has sold, the couple is facing a classic personal finance dilemma: Should they aggressively pay down their mortgage, or invest the money elsewhere?
They have around $150,000 in liquid assets across checking, savings, and brokerage accounts — and another $190,000 in retirement savings.
They plan to refinance once interest rates come down. But in the meantime, they’re weighing what to prioritize.
By attacking the mortgage aggressively, the couple could save hundreds of thousands of dollars over the life of the loan. Even an extra payment each year can save you six figures and take years off the term. More aggressive strategies can save even more money and severely shorten the payment schedule.
Paying down the loan aggressively could also help them eliminate PMI faster. They can request that monthly $72 fee disappear once they hit 20% equity.
The benefit? Paying off a mortgage at 7.5% provides a guaranteed return that would be hard to beat with low-risk investments. The psychological reward of reducing debt — especially one that stretches 30 years — is another factor.
On the other hand, some argue that the couple would be better off focusing on investments, especially inside tax-advantaged retirement accounts. It’s possible a diversified portfolio of stocks can net a higher annual return on average than would be saved on the mortgage — although there’s no guarantee in any given year.
Greg and Maya already have solid retirement savings, but maxing out their IRA and 401(k) accounts could further grow their tax-advantaged wealth.
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There’s also the question of liquidity. If Greg and Maya put most of their spare cash toward the mortgage, they might not have enough left to handle a surprise expense.
