Answer

My husband insists we pay off our home as soon as possible by making extra mortgage payments of $200 each month which will cut our 30-yr. mortgage down to being paid off in 10 years. We have a 7.875% interest rate mortgage. He wants to take out a home equity loan which won't cost anything and pay it off in 10 years. I think we should take that $200 and invest in his 401k. He is 55 and we only have 10 yrs. to pay off the house and save for my son's college. I am not working and we have to be careful with money. Which would you think is the better investment?

A 401(k) contribution, which is tax-deferred and made with before-tax dollars, is almost always a better choice than principal pre-payment. This is especially true if there is employer matching. Also, when you have growth options (e.g., stock funds) to select from that can be expected to earn a higher rate than your mortgage rate over the long term. It is not wise to pass up the opportunity to contribute to a 401(k). Employer matching is "free money" that no one should pass up if they are lucky enough to receive it. I generally advise principal prepayment ONLY AFTER repaying all high-interest debt (e.g., 18% credit cards) and after fully funding an employer salary reduction plan like a 401(k) and a IRA (Roth or traditional). The 1998 maximum annual limit for 401(k)s is $10,000.