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Paying off a mortgage early vs Putting money into an IRA
Posted on 1/3/13 at 9:20 am
Posted on 1/3/13 at 9:20 am
Which is the better option to work towrads? I have a mortgage that's approximately $275,000 right now. I opened a Roth IRA about three or four years ago for my wife and myself. Is it wiser to send those IRA funds towards extra payments to get the house paid off early or should I continue putting money into an IRA and just pay the mortgage as is.
I'm leaning towards suspending the IRA payments and using those funds towards paying off the home early. My wife and I contribute towards 401K plans for retirement.
ETA: I just ran the numbers on bankrate.com and it's estimated that our 30 year mortgage can be shortened by 12 years if I did this and we'll save approximately $75,000 in interest payments over the term of the loan.
I'm leaning towards suspending the IRA payments and using those funds towards paying off the home early. My wife and I contribute towards 401K plans for retirement.
ETA: I just ran the numbers on bankrate.com and it's estimated that our 30 year mortgage can be shortened by 12 years if I did this and we'll save approximately $75,000 in interest payments over the term of the loan.
This post was edited on 1/3/13 at 9:24 am
8
Posted on 1/3/13 at 9:23 am to Hammond Tiger Fan
Someone that can run the numbers would need your interest rate on the home loan...
Posted on 1/3/13 at 9:24 am to Hammond Tiger Fan
quote:
Which is the better option to work towrads?
I would imagine paying down the mortgage would be the smartest option. Hell, 90% of your monthly payment for the first 15yrs goes strictly towards interest. Plus, yall are already contributing towards 401ks.
But I'm def not a financial expert
Posted on 1/3/13 at 9:27 am to Hammond Tiger Fan
Your effective RoI for paying off principle is likely around 3%. You are very likely to do better than that investing. It's difficult to measure the "good feeling" of having your house paid off vs having a few extra $100grand in the bank earning interest. Also from a risk standpoint, a home is a very difficult process for banks to take from you if you start missing payments. Also check out your state laws with regard to bankruptcy and liability claims if you want to get down to the details. Also as you get older and if you or your wife need to be made wards of the state, you may want to see what the state can take from you.
Posted on 1/3/13 at 9:31 am to Hammond Tiger Fan
quote:
ETA: I just ran the numbers on bankrate.com and it's estimated that our 30 year mortgage can be shortened by 12 years if I did this and we'll save approximately $75,000 in interest payments over the term of the loan.
What would the value of the 401K be at retirement if you suspended contributions for 12 years? I'm just shooting from the hip here but if you get an average annual 7-10% return in the 401K and are paying current rates for your mortgage 3.5-4% you may be better off paying the mortgage down more quickly but not quite as aggressively as you planned. Theres some tax benefits of the 401K, the mortgage interest deductions and whatnot to consider too.
This post was edited on 1/3/13 at 9:32 am
Posted on 1/3/13 at 10:26 am to Hammond Tiger Fan
I don't see any way paying your mortgage would be the correct answer here with the interest rates today.
Posted on 1/3/13 at 10:34 am to Hammond Tiger Fan
I'd save my money and not worry with mortgage payoff. Better to have a pile of cash earning something. Once you give a big dollar amount away, you lose it's earning capacity forever. Can't spend a house when buying necessities.
Posted on 1/3/13 at 10:48 am to Hammond Tiger Fan
max out the roth ira annually! do not stop doing that!
as far as paying off the house that is up to you. depends on interest rate and your goals and situation in life. i paid mine off early for many reasons that may not be applicable to your situation.
how much do you put in the 401k annually?
as far as paying off the house that is up to you. depends on interest rate and your goals and situation in life. i paid mine off early for many reasons that may not be applicable to your situation.
how much do you put in the 401k annually?
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.
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