The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: HoundDog on November 12, 2016, 08:43:39 AM
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I know that people have different opinions on paying off a mortgage early vs. trying to get a higher return in stocks.
My wife and I would love to pay off our house.
We owe about $70,000 on the mortgage, which is at 3.75 percent fixed. We have just about that much in terms of Roth IRA contributions, so we could use that money without tax penalties.
I know that over the long run the Roth IRA money is likely to earn more if we leave it invested. But part of me really wants to pay off the house. I kind of want the peace of mind now, and don't mind paying a reasonable price for it.
Would this be crazy?
The plan after paying off the mortgage would be to invest as much as we can once again. We have other retirement accounts, but they're not huge by any means. We are in early middle age and have kids.
Thoughts?
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Don't do it. 3.75 is a very good mortgage rate. Once you pull the money out of the Roth you can never put it back in.
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I wouldn't do it either. Just because you can, doesn't mean you should. That is a pretty decent rate. How many years are left on the mortgage?
If you really want to get rid of the mortgage, maybe you could scale back on future retirement contributions and focus on making extra payments on the mortgage now. Whatever you have invested now is worth a lot more than what you'll invest in the future.
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I would never do this. The value of that Roth 20 years from now is way too valuable. Throw extra cash at the mortgage, don't give up your tax advantage.
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Would this be crazy?
Yes. Crazy. Don't do it.
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This is not crazy. But absolutely NUTS!!!!!!!
Don't Do It!!!!
ETA: And Welcome to the MMM forums.
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OP: You haven't provided much information in your post, such as earnings, savings
rate, age, etc., but my first reaction is in agreement with everyone else. $70K is not
a lot of mortgage debt at 3.75% for two people at almost any income level. The mortgage
will one day be paid off (or the house sold) -- you will meanwhile have given up all the
benefits of allowing your money to compound in a Roth IRA. Don't do it.
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how many years of mortgage do you have left?
3.75% is a low rate, what will inflation likely be over same time period?
Your money in the Roth should be making far more than 3.75% and will compound over time.
Your peace of mind at the end of your mortgage over it's normal term will be far greater with a much, much bigger Roth.
Do not take the Roth $ to pay off your mortgage, there are a million threads on here discussing this.
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Thanks guys. I've decided not to raid the Roth. However, for the next year we are still going to make extra payments on the house and try to get it paid off. That means the retirement contributions will be a little light for that period, but that's the compromise.
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Thanks guys. I've decided not to raid the Roth. However, for the next year we are still going to make extra payments on the house and try to get it paid off. That means the retirement contributions will be a little light for that period, but that's the compromise.
Good idea. Think of the mortgage pre-payment as your "bond allocation"; that's what I do.
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Here's what you don't know yet. Just like the folks who believe that their lives are going to be all butterflies and roses when their SL's or CC's are paid off, "killing" a cheap mortgage at the expense of retirement savings will NOT make you a happier person. Killing the mortgage will not help you sleep better at night either. You know what will? A giant ball of money, consisting largely of investment returns and compound interest. Never scrimp on retirement savings to prepay the mortgage. Get at least to FI, then pay the sucker off if you want to.
We're FI & I'm RE. We have a Big Ball O' Money (BBOM) and paid cash for our current home. It's been three years and we both still feel like we're missing out by not having someone else's cheap money working for us. FWP, to be sure.
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I look at these as asset allocation issues. And like Diane C says above I would much rather have a diversified Big Ball of Money and a low-interest fixed mortgage versus a monolithic chunk of equity in a single piece of real estate and no mortgage.
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It's OK to compare paying off a mortgage to a bond allocation in a taxable account. It's not OK to compare paying off a mortgage to saving in a tax advantaged account. Fill your tax advantaged accounts as much as you can before you worry about extra principal on the mortgage.