Today’s post not only includes a replay of what you heard on the radio this morning at MomsMakingaMillion in a show that was focused on homeownership, more specifically about how to pay down your mortgage and finance your 401(k) and includes some additional information that took place as well.

This part of the post actually appeared a couple of days ago and additional content has been added at the end.

In spite of the bleak economic news posted last week, the economy is not as bad for the majority of us as it is portrayed in the media. It is difficult however to ignore the plight our neighbors are going through, the prolonged unemployment, the forced early retirement, the underwater mortgages that are, if anything, keeping them from getting back on their feet. But the vast majority of us understand now that we need to take care of our personal finances – seemingly much more personal now than they were in the past – and that will quite possibly help the overall recovery. The more stable footing we have, the greater the chances our impact on the economy improves.

But today, I thought I’d focus on making the decisions you may have not considered: Is paying down the mortgage better than maxing out your 401(k)? We often focus on the 401(k), the self driven retirement plan many of us have at work as the be-all-to-end-all retirement plan. It comes close but only as close as your debt in retirement allows. If you are headed towards retirement with a home mortgage, calculating the net downside of that mortgage can give you even more pressure to work more, contribute more or simply put off your retirement until a later date.

In every calculation about retirement, money stands front and center to its success. But you need a place to live and the vast majority of Americans looking at retirement in the next ten-years have a house payment saddling their plans. So I thought I’d run some numbers and offer some suggestions.

Although the actual numbers vary on where you live, $200,000 is about the average home price. A 30 year mortgage with a 6% rate will cost you about $1200 a month in mortgage payments with taxes and insurance excluded. These are rough and rounded numbers. Now if you were able to make a $100 a month additional payment, $1200 divided by 12, and apply it to the principal, the savings in total interest would be about $48,000 and it would shorten the loan by over 5yrs. So an extra $100 applied to principal would turn your 30 year mortgage into a 25 year mortgage.

The math gets better the more you pay. For instance, make a thirteenth and fourteen month payment (and for these calculations to work, you need to do it every month, not just once a year – although that’s not a bad way to use the out-sized tax return) you would save almost $79,000 in interest payments and the loan would now be for 21 years. No paper work, no refinancing, no hassle and you just theoretically made $79,000.

How much would you have made had you invested the same amount in your 401(k)? Keep in mind, your mortgage is fixed at 6% and your 401(k), no matter what you invest in will have some fluctuation over time and it may never successfully return you a steady 6%. But the numbers go something like this: Invest $100 a month for 360 months at 6% return will net you a $12,000 a year income in retirement for ten-years. This means that if you are 45 and save a paltry $100 a month in your 401(k) – and I hope you are investing more than that – you will get a monthly payout for ten-years of about your mortgage payment.

But the difference is what you saved compared to what you will have to continue to pay for the loan. One allows you to enter retirement in full ownership of you house; the other gives you the ability to pay your mortgage with your retirement income. Even retirement planning neophytes can determine the benefits of having no loan and an income rather than having the income to maintain a loan.

I used an average $40,000 household income as an example and $100 as the contribution to the principal. If you were to make a contribution to your 401(k) of just $25 a week based on that income, you would come out with the results I have offered here. But if you were able to make both – a $25 a week contribution to your 401(k), which is just about 4% and make a $25 contribution to mortgage pre-payment plan, you will have only taken about $200 off the monthly budget.

The trade-off seems even but having a paid-for home in retirement gives you an great deal of economic peace of mind in terms of known worth, the potential to reverse mortgage the house and the ability to borrow against it should it come down to it. We have to live somewhere and this insures that where you live will be what you own.

And then Gina wanted to know more about my thoughts on homeownership.

Is it an asset when you still owe on it? The simple answer is no and I added that it should be considered an investment if it was or if you feel as though you have some equity. There are several reasons for this. One, most people do simple math when it comes to homeownership. They calculate what they paid for the house against the selling price. Doing this excludes years of upkeep and improvements, the interest you paid over that time and of course, inflation, which has the net effect of reducing your dollar’s worth over time. And two, an investment in its true form is actually something you can easily liquidate.

Is it better to rent or to buy? The roundabout answer is “depends on who you are”. The more specific answer is “how much HGTV have you been watching”? In truth, it has everything to do with your work. One of the main problems with owning a house, and this was made crystal clear in the current economy, is lack of mobility.

Folks who said they were underwater in their homes were basing the problem on their inability to move when they needed to, in part because the loss would have been too great a mental and financial burden to bear. (Mentally paying on the difference of the selling price on a loan that was worth more than the property and financially, because we all assume we will get something from the property to purchase another home where the job is.)

Renting gives you far more options. It gives you the ability to live relatively close to work so some costs like transportation would be eliminated. In theory, this should free up additional money to invest in your retirement plan which is an excellent resource for accumulating a downpayment on your first home. renting is often less expensive and if you run into a rough patch, you can easily downsize to accommodate and financial bumps in the road. And renting demands a more communal mindset.

Buying a home on the other hand still carries with some advantages, one of which is the tax deduction for the interest you paid. But this is quickly offset by the cost of the house. No one in my experience has ever moved into a house and not done a thing for ten-years (the time when you are paying the most in interest and when the tax deduction is at its best). Homes are, as the old saying goes: a hole in the ground you throw money into.

But in retirement, they take on a new role: the peace of mind of owning the roof over your head and being able to financially leverage it against retirement problems, most of which are not predictable can’t be beat. As a last resort, you could reverse the mortgage on your house (emphasis on last resort) and in the short-term, could be used for a loan against your equity.

Gina wanted to know whether we could or should do both, buy down the mortgage and pay our 401(k)? And she made a good point in the process that if you don’t have a mortgage payment in retirement, its almost like have twice the retirement income. Which would be nice but what it would do is allow you to retire without worry about the debt, often the largest we have, to subtract from what we need in retirement.

In this instance, it is the little steps made now that can have a huge impact thirty years from now.