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re: Paying off a mortgage early vs Putting money into an IRA
Posted on 1/3/13 at 11:13 am to Venelar
Posted on 1/3/13 at 11:13 am to Venelar
quote:
Venelar
everybody's situation is different for a plethora of reasons.
plenty here think everybody just bought a new house and has a 30 year 3.75% rate and that their job is as stable as the rock of gibralter. well, that is not so for many especially in this shitty economy.
there could be people with high interest rates who are close to paying off a home so they do not want to refi and pay closing. they may not have the credit to do it anyway. people who may have struggled at times and are sick of paying notes. sick of being in debt. many reasons.
0
Posted on 1/3/13 at 12:31 pm to Hammond Tiger Fan
You should invest money in whatever pays the highest rate of return, obviously.
I don't know your numbers, so I'll use mine to illustrate. Just this past month I refi'd to a 30 year mortgage at 3.25%. Assuming a 25% marginal tax rate the after-tax ROI is 3.25 x (1 - 0.75) = about 2.4%. Of course, a 15 year is even lower.
I think I can beat a 2.4% return overall during the next 30 years in my Roth, so I max my Roth.
In fact, I see no reason at all to prepay the mortgage, that is basically the same as investing in a 30 year CD at a 2.4% return.
Some people want to be "debt free" and all, and in a typical interest rate environment that could make a lot more sense, but not at these rates.
I don't know your numbers, so I'll use mine to illustrate. Just this past month I refi'd to a 30 year mortgage at 3.25%. Assuming a 25% marginal tax rate the after-tax ROI is 3.25 x (1 - 0.75) = about 2.4%. Of course, a 15 year is even lower.
I think I can beat a 2.4% return overall during the next 30 years in my Roth, so I max my Roth.
In fact, I see no reason at all to prepay the mortgage, that is basically the same as investing in a 30 year CD at a 2.4% return.
Some people want to be "debt free" and all, and in a typical interest rate environment that could make a lot more sense, but not at these rates.
Posted on 1/3/13 at 12:44 pm to foshizzle
Two questions.
First, if you're not sure, why not split the difference? Contribute 50% of your excess to the Roths and 50% to mortgage prepayment.
Second, I don't really get the dilemma. Your Roth IRA contributions can be withdrawn without penalty in a time of need. If you don't think that your Roth contributions will still be there in full to serve you in an crisis, and/or that your Roth will beat that 2.4% (or whatever) mark annualized over that time period, then I would question why you would even consider contributing.
First, if you're not sure, why not split the difference? Contribute 50% of your excess to the Roths and 50% to mortgage prepayment.
Second, I don't really get the dilemma. Your Roth IRA contributions can be withdrawn without penalty in a time of need. If you don't think that your Roth contributions will still be there in full to serve you in an crisis, and/or that your Roth will beat that 2.4% (or whatever) mark annualized over that time period, then I would question why you would even consider contributing.
This post was edited on 1/3/13 at 12:46 pm
Posted on 1/3/13 at 12:50 pm to foshizzle
Maxing your Roth IRA will be the correct answer 99% of the time as foshizzle's example shows. You are pretty much guaranteed a higher rate a higher rate of return with your IRA.
The mortgage has other benefits if you keep it including the mortgage interest deduction. The Roth IRA personal contribution money is fluid. You can take our your contribution (not gains) tax and penalty free. It can be used as a serious rainy day fund if needed.
Also, are you and your wife under the $173,000 a year income and contributing the maximum to both the 401k and Roth IRAs? If you are, that's a considerable amount of savings at that income level (congrats!).
The mortgage has other benefits if you keep it including the mortgage interest deduction. The Roth IRA personal contribution money is fluid. You can take our your contribution (not gains) tax and penalty free. It can be used as a serious rainy day fund if needed.
Also, are you and your wife under the $173,000 a year income and contributing the maximum to both the 401k and Roth IRAs? If you are, that's a considerable amount of savings at that income level (congrats!).
Posted on 1/3/13 at 3:18 pm to polizei11
Prepaying a mortgage at the current rates doesn't even keep you ahead of inflation. There is no good financial reason to do this.
Like I said, that's mostly because rates are so incredibly low right now though. Back when an 8% rate was common, prepaying wasn't necessarily a bad move at all.
Like I said, that's mostly because rates are so incredibly low right now though. Back when an 8% rate was common, prepaying wasn't necessarily a bad move at all.
Posted on 1/3/13 at 3:54 pm to foshizzle
quote:
You should invest money in whatever pays the highest rate of return, obviously.
quote:Exactly.
Some people want to be "debt free" and all, and in a typical interest rate environment that could make a lot more sense, but not at these rates.
We've seen several of these threads.
So at expense of repetition, the decision is driven by anticipation of inflation rates over life of the loan, mortgage deductibility (continued as policy or not), and how the individual plans to use monies otherwise tied up in paying off a home.
Financial Plans - Advice here is predicated on assumption that in not paying off mortgage, preserved liquidity is used for savings/investment rather than spending.
Deductibility - Addressed well with foshizzle's "ROI = 3.25 x (1 - 0.75) = 2.4%" equation above.
Inflation Hedge - If one expect's inflation rates to rise, a low fixed rate mortgage is an excellent hedge (self-explanatory). If one expects rates to decline, owning fixed debt at present cost would not be as helpful.
IMO, risk of inflation is significant.
Historic interest rates.
This post was edited on 1/3/13 at 4:01 pm
Posted on 1/3/13 at 10:18 pm to NC_Tigah
quote:
If one expects rates to decline, owning fixed debt at present cost would not be as helpful.
I should hasten to add that I selected a 30 year fixed rate mortgage for a reason. If rates stay at these levels for the next 30 years I will eat my shirt. Japan has showed it can happen but the downside is pretty tiny.
IMO of course.
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