Extra principle mortgage payments or mutual funds?

[climberdella]

I am a graduate student making $26k/year. I manage to put away $5k/year into a Roth IRA, and the rest mostly goes to bills and living expenses. I still owe a little less than $80k on my 2bdrm condo, with an interest rate of 3.5%. My question is: I usually have ~$200/month left after everything else- is it better to put it towards the principle on my condo (which is what I have been doing) or put it into more mutual funds? I already put the max into my Roth IRA, but I could start a regular mutual fund account.

[ncornilsen]

I vote option 3: Index funds.

Your return on that $200/month invest in index funds will be higher over the long run (~7% real) than on the mortgage (~2.75 real after the Mortgage interest deduction.).

But, if having less debt is worth more to you than that spread, pay the mortgage first.

[Eric]

Have you read the MMM post on this topic?

http://www.mrmoneymustache.com/2012/02/24/pay-down-the-mortgage-or-invest-more-a-winwin-question/

[Jamesqf]

I vote option 3: Index funds.

Index funds ARE mutual funds.

In your position, I think I would be putting most of the money into a regular mutual fund account, simply because you don't seem to have much of an accessible stash.

[AlmostIndependent]

From a strictly financial viewpoint invest the extra. An index fund will handily beat 3.5% in the long run. If having the mortgage paid off makes you feel better than go for it. You can't lose either way.

[climberdella]

Have you read the MMM post on this topic?

http://www.mrmoneymustache.com/2012/02/24/pay-down-the-mortgage-or-invest-more-a-winwin-question/

Thanks!

[ncornilsen]

I vote option 3: Index funds.

Index funds ARE mutual funds.

In your position, I think I would be putting most of the money into a regular mutual fund account, simply because you don't seem to have much of an accessible stash.

Fair enough. I guess I equated a mutual fund with an actively managed fund.