Author Topic: Paying towards mortgage principle vs roth ira contribution  (Read 1410 times)

zoochadookdook

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Paying towards mortgage principle vs roth ira contribution
« on: September 17, 2018, 02:57:50 PM »
Hey all. I have a mortgage through a loan via edward jones (it's variable not fixed). My father signed on the title as my income alone after write offs for taxes (self employed while in school) wasn't enough to qualify me for a traditional mortgage. I'm 26 and in my last college semester.

The current balance is around 105,000. every month it's about 300 in interest/270 ish towards principle. I also owe another 20k interest free to my father directly (in exchange I roofed his barn/keep his landscaping cared for etc)

I've been contributing 480 towards my roth ira every month instead of putting it towards the principle on this mortgage but recently wondered why I was doing that. I make around 2500 a month-living expenses total with tax/mortgage etc is around 1300 plus whatever else comes up. I have around 50k in the bank and 13k in student debt (no interest until next fall). No car loan (drive a beater). Current roth balance is 23k.

I guess I'm just wondering if i should be doubling down on my mortgage principle vs contributing to my roth or even opening a 401k. Thanks
« Last Edit: October 04, 2018, 06:06:11 PM by zoochadookdook »

dandarc

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Re: Paying towards mortgage principle vs roth ira contribution
« Reply #1 on: September 17, 2018, 03:17:54 PM »
See investment order - https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153.

I would not pay down the mortgage early vs. maxing out a Roth IRA - that is tax-free forever money and you can't catch up in years you miss. You may want to look at refinancing the mortgage to a fixed-rate.

I would be more worried about the $50K in cash - it is not helping you having that much of your resources earning nothing.

I would pay back the 20K to your dad - the interest on that one sounds astronomical (unless you'd do all that work regardless).

What kind of interest rate do you have on the student loans? If it is low enough, you invest, if it is high then you pay off the debt.

But your tax advantaged accounts should be a high priority

zoochadookdook

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Re: Paying towards mortgage principle vs roth ira contribution
« Reply #2 on: September 17, 2018, 03:27:26 PM »
So i only took the unsubsidized which had a pretty low rate around 4%average and the govt. Pays the interest until 6 months after you graduate). The landscaping isn't  awful at all.

The cash i saved up for years paying rent living on my buddies spare couch while working. I basically buy and resell it equipment and commercial fitness stuff. I'm  currently exploring opening a fitness equipment company with that (all the major suppliers are in china) but I feel silly for having it sit losing value.

dandarc

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Re: Paying towards mortgage principle vs roth ira contribution
« Reply #3 on: September 17, 2018, 03:44:03 PM »
I see - the $50K is more of the cash account for starting up a business. With that, I'd lean even more towards don't pay extra to the mortgage - if down the road you do wind up needing to stop IRA payments, it should be to better fund your business / get through the lean years at the beginning and not to pre-pay a low interest loan.

Until you completely pay the mortgage off, you still have to make the payments month in and month out.  Your risk actually increases by pre-paying the mortgage until you get to 0. If you can refinance to a fixed-rate mortgage, then you don't have to worry about future adjustments making the interest too high. You'd expect either stock mutual funds in your Roth IRA or your small business to return more than the interest on the mortgage in the long term, so either is a better use of extra dollars.

MDM

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Re: Paying towards mortgage principle vs roth ira contribution
« Reply #4 on: September 17, 2018, 03:52:07 PM »
The current balance is around 105,000. every month it's about 300 in interest/270 ish towards principle.
300*12/105000 = 3.43%.

At that rate I would pay the minimum and invest in stocks.

But between leaving money in the bank and paying ahead on the mortgage, I'd pay ahead on the mortgage.

Goldielocks

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Re: Paying towards mortgage principle vs roth ira contribution
« Reply #5 on: September 17, 2018, 05:58:26 PM »
I would give my Dad the information you posted in the OP.

He is subsizing the loans, one way or another, and you want him happy with the choice to make more money with your cash / income, rather than paying him back faster / getting him off your mortgage.

If his is A-ok with that, then you are doing the right thing -- ROTH, Business (while being smart about it), etc.

One

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Re: Paying towards mortgage principle vs roth ira contribution
« Reply #6 on: September 17, 2018, 07:51:22 PM »
What if you time the market. Pay the extra towards the mortgage but if there's a pull back in the market pay towards the roth. Do both.

zoochadookdook

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Re: Paying towards mortgage principle vs roth ira contribution
« Reply #7 on: September 17, 2018, 09:46:25 PM »
I would give my Dad the information you posted in the OP.

He is subsizing the loans, one way or another, and you want him happy with the choice to make more money with your cash / income, rather than paying him back faster / getting him off your mortgage.

If his is A-ok with that, then you are doing the right thing -- ROTH, Business (while being smart about it), etc.

Yeah; so he isn't concerned so much about the loan-he's concerned about having me on a fixed rate mortgage (the hype that the fed rate will jump exponentially has been blown up the last few years). He's pretty well off. The issue I've been having is the taxable income banks look at for a mortgage hasn't been high enough. Most of this is due to mileage write offs. I own a $2000 honda civic that is used exclusively for work at .52 cents a mile. Last year along I drove 25k working miles (yeah a lot of road time).

zoochadookdook

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Re: Paying towards mortgage principle vs roth ira contribution
« Reply #8 on: September 17, 2018, 09:50:09 PM »
I see - the $50K is more of the cash account for starting up a business. With that, I'd lean even more towards don't pay extra to the mortgage - if down the road you do wind up needing to stop IRA payments, it should be to better fund your business / get through the lean years at the beginning and not to pre-pay a low interest loan.

Until you completely pay the mortgage off, you still have to make the payments month in and month out.  Your risk actually increases by pre-paying the mortgage until you get to 0. If you can refinance to a fixed-rate mortgage, then you don't have to worry about future adjustments making the interest too high. You'd expect either stock mutual funds in your Roth IRA or your small business to return more than the interest on the mortgage in the long term, so either is a better use of extra dollars.

Right so all my LLC transactions (buying inventory selling) are generally cash. To be realistic I probably only need 10,000 at a time for inventory outflow-inflow.

I'm exploring new ventures as I'm graduating this fall and not sure If I'm the office 9-5 type. I worked a internship all summer as a data scientist and it was enlightening. The concept of seeing the work you put in directly transferred to successes and failures drives me towards entrepreneurship and while I only make the mid 20k as is-I only work maybe 5-6 hours a week. I'm hoping to find a business outlet/at least a flexible entry job in IT at the end of this semester.

zoochadookdook

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Re: Paying towards mortgage principle vs roth ira contribution
« Reply #9 on: September 17, 2018, 09:51:43 PM »
What if you time the market. Pay the extra towards the mortgage but if there's a pull back in the market pay towards the roth. Do both.

That's an interesting idea. My Roth is the generic vanguard target data fund and I have it set to direct withdrawal for ease-but it'd be simple enough to swap it over.

Full_Beard

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Re: Paying towards mortgage principle vs roth ira contribution
« Reply #10 on: September 18, 2018, 12:10:30 AM »
What are the actual terms of your variable mortgage?

I generally prefer to go with the advice here and max out Roth IRA first, but if your variable mortgage can bite you in the ass, I'd consider deviating from that -- either switching to a fixed mortgage soon or paying that down faster. And this isn't an all or nothing proposition -- you could contribute some to a Roth and pay down the mortgage some.

talltexan

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Re: Paying towards mortgage principle vs roth ira contribution
« Reply #11 on: September 18, 2018, 08:33:51 AM »
Your dad is bearing a lot of risk for you:

  • Creditor of yours for $20,000
  • Co-signer of yours for a $105,000 mortgage

Have you spoken with him about these strategies? He may be doing these things specifically to create the space for you to utilize the Roth, particularly if his income is so high that he cannot contribute to a Roth himself. Contributing to a Roth when you have a low taxable income is very smart.

What is your long-term intention for the property? Do you plan to stay in the area once you finish school? Is there a lot of equity in it already? You're free from the risk of rent-increases, but the ownership of the property opens up other risks that you may be bearing.

zoochadookdook

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Re: Paying towards mortgage principle vs roth ira contribution
« Reply #12 on: September 18, 2018, 04:50:38 PM »
Your dad is bearing a lot of risk for you:

  • Creditor of yours for $20,000
  • Co-signer of yours for a $105,000 mortgage

Have you spoken with him about these strategies? He may be doing these things specifically to create the space for you to utilize the Roth, particularly if his income is so high that he cannot contribute to a Roth himself. Contributing to a Roth when you have a low taxable income is very smart.

What is your long-term intention for the property? Do you plan to stay in the area once you finish school? Is there a lot of equity in it already? You're free from the risk of rent-increases, but the ownership of the property opens up other risks that you may be bearing.

The plus side of the property is I put 20k down as well as some renovations (new roof, new paint, new floors, finishing the basement currently, new insulation etc). Market value has inflated since purchase and sits around 230-240k right now. Purchase price was originally 141k. If I were to default he's pretty in the green risk wise.

I wouldn't mind keeping it as a rental or selling if I can get a good enough job. It really depends on what the job market looks like in the next 5 months.

dandarc

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Re: Paying towards mortgage principle vs roth ira contribution
« Reply #13 on: September 18, 2018, 04:58:47 PM »
Your dad is bearing a lot of risk for you:

  • Creditor of yours for $20,000
  • Co-signer of yours for a $105,000 mortgage

Have you spoken with him about these strategies? He may be doing these things specifically to create the space for you to utilize the Roth, particularly if his income is so high that he cannot contribute to a Roth himself. Contributing to a Roth when you have a low taxable income is very smart.

What is your long-term intention for the property? Do you plan to stay in the area once you finish school? Is there a lot of equity in it already? You're free from the risk of rent-increases, but the ownership of the property opens up other risks that you may be bearing.

The plus side of the property is I put 20k down as well as some renovations (new roof, new paint, new floors, finishing the basement currently, new insulation etc). Market value has inflated since purchase and sits around 230-240k right now. Purchase price was originally 141k. If I were to default he's pretty in the green risk wise.

I wouldn't mind keeping it as a rental or selling if I can get a good enough job. It really depends on what the job market looks like in the next 5 months.
With a <50% LTV and your dad already on the loan, I have to think the two of you can get refinanced into a fixed rate mortgage somewhere. Maybe if you take a corporate-ish job in the near term you can make that happen on your own. Talk to small banks and credit unions - they seem to be more able to think than a lot of the large banks.

zoochadookdook

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Re: Paying towards mortgage principle vs roth ira contribution
« Reply #14 on: September 18, 2018, 05:17:41 PM »
What are the actual terms of your variable mortgage?

I generally prefer to go with the advice here and max out Roth IRA first, but if your variable mortgage can bite you in the ass, I'd consider deviating from that -- either switching to a fixed mortgage soon or paying that down faster. And this isn't an all or nothing proposition -- you could contribute some to a Roth and pay down the mortgage some.

It's a loan that's in line with the federal prime rate. It's directly against his 401k

Full_Beard

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Re: Paying towards mortgage principle vs roth ira contribution
« Reply #15 on: September 19, 2018, 12:33:13 AM »
Quote from: zoochadookdook
It's a loan that's in line with the federal prime rate. It's directly against his 401k
I'd probably start the Roth, pay minimum on the loan, refinance when you have a job/income to a fixed, 15- or 20-year mortgage. If it has appreciated as much as you say, you won't have to put anything into it. 20 years, $105k at 4.25% is $650 per month. I assume you're paying more than that now.

MustacheAndaHalf

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Re: Paying towards mortgage principle vs roth ira contribution
« Reply #16 on: September 19, 2018, 08:31:47 AM »
I think preparing for the worst is a good way to avoid it.  Worst case is going broke in a business that doesn't pan out.  And actually, in bankruptcy you can keep your Roth IRAs (up to a certain amount).  So I'd contribute to the Roth IRA: tax advantaged savings, and money you keep even if your first business doesn't work out.

Have you considered working in a small business for awhile before starting your own?  You could learn how to handle things that might otherwise sink a new business.  That's one way to reduce risk.

If you go broke, you lose the house.  I think it's better to have money in the bank ready to pay the mortgage, rather than spend that money chasing a small return.  Also keep in mind the mortgage payments include interest, which is tax deductible.  So the actual return on pre-paying is less than you expect, since you lose some tax benefit.

Pay the Roth, keep the cash, wait for your business to succeed before spending cash.  A business without cash is no longer a business.

Full_Beard

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Re: Paying towards mortgage principle vs roth ira contribution
« Reply #17 on: September 19, 2018, 10:55:07 PM »
Quote from: MustacheAndaHalf


If you go broke, you lose the house.

It's more complicated than that. Depends on how much equity you have, how much is exempt under state law, and the section of the bankruptcy code under which you file.

talltexan

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Re: Paying towards mortgage principle vs roth ira contribution
« Reply #18 on: September 20, 2018, 08:28:53 AM »
Your dad is bearing a lot of risk for you:

  • Creditor of yours for $20,000
  • Co-signer of yours for a $105,000 mortgage

Have you spoken with him about these strategies? He may be doing these things specifically to create the space for you to utilize the Roth, particularly if his income is so high that he cannot contribute to a Roth himself. Contributing to a Roth when you have a low taxable income is very smart.

What is your long-term intention for the property? Do you plan to stay in the area once you finish school? Is there a lot of equity in it already? You're free from the risk of rent-increases, but the ownership of the property opens up other risks that you may be bearing.

The plus side of the property is I put 20k down as well as some renovations (new roof, new paint, new floors, finishing the basement currently, new insulation etc). Market value has inflated since purchase and sits around 230-240k right now. Purchase price was originally 141k. If I were to default he's pretty in the green risk wise.

I wouldn't mind keeping it as a rental or selling if I can get a good enough job. It really depends on what the job market looks like in the next 5 months.
With a <50% LTV and your dad already on the loan, I have to think the two of you can get refinanced into a fixed rate mortgage somewhere. Maybe if you take a corporate-ish job in the near term you can make that happen on your own. Talk to small banks and credit unions - they seem to be more able to think than a lot of the large banks.

If your dad is on the loan for the house, is he also on the title?

zoochadookdook

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Re: Paying towards mortgage principle vs roth ira contribution
« Reply #19 on: October 04, 2018, 06:03:21 PM »
yep so he is on the title with me.'


Regarding working for a small business I'd consider just about anything. I do direct sales now (snagging commercial gym and IT equipment for resale on craigslist, fb market place etc). I also rent a room out in the home for 600 a month.  Earnings in 2018 so far are 42k with maybe 5-6 hours a week.

I did work a internship as a data scientist using SQL and manipulation to run queries and such and it really just hit me how much I might dislike an office job. I like solving issues, making money, selling, knowing products, marketing and making things just happen. I graduate this semester and was considering applying to the local electricians union because the pay and benefits are quite good in my state and I'd get to work with my hands. I always wished I had gone into engineering or construction because I see the value of trades.

Sorry this is a bit back and forth.

zoochadookdook

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Re: Paying towards mortgage principle vs roth ira contribution
« Reply #20 on: October 04, 2018, 06:07:35 PM »
I also don't know if I should contribute to a 401k. I pay taxes the 4th quarter every year *so that still has to hit* but even with write offs at 45k initial I'm not sure if I'd qualify for a mortgage refinance.

ian055

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Re: Paying towards mortgage principle vs roth ira contribution
« Reply #21 on: October 05, 2018, 08:55:06 AM »
Max out the Roth, since you can't go back in time and make that up. You've got years ahead of you, so the power of compounding and time works in your favor here.

Refinance the mortgage. Not sure if this was already mentioned, but have you thought about house hacking? Use that extra money to pay off your debts.
« Last Edit: October 05, 2018, 08:58:16 AM by ian055 »

Clean Shaven

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Re: Paying towards mortgage principle vs roth ira contribution
« Reply #22 on: October 05, 2018, 09:02:47 AM »
Go with the "investment order" linked above, IMHO.

Re: 401K - do you have any matching by an employer or would this be a solo 401K?

zoochadookdook

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Re: Paying towards mortgage principle vs roth ira contribution
« Reply #23 on: October 05, 2018, 02:30:41 PM »
Max out the Roth, since you can't go back in time and make that up. You've got years ahead of you, so the power of compounding and time works in your favor here.

Refinance the mortgage. Not sure if this was already mentioned, but have you thought about house hacking? Use that extra money to pay off your debts.

cool. Will do. The issue is I'll have 50k after paying off the 13k in student loans (so technically I have 63k liquid right now). That money isn't working for me sitting around and I really only need so much as an emergency fund/maybe 10k liquid for business inflows monthly. Not really sure what to do with that.

What's house hacking? I'm hoping to refinance this year but last year my 30k after a 35k mileage write-off Brought my taxable income to like 12k. I'll have to skip a bunch of write offs or such and just eat a bunch of taxes this year if I expect to refinance.

zoochadookdook

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Re: Paying towards mortgage principle vs roth ira contribution
« Reply #24 on: October 05, 2018, 02:32:05 PM »
Go with the "investment order" linked above, IMHO.

Re: 401K - do you have any matching by an employer or would this be a solo 401K?

I'm self employed (LLC). That's why the refinancing is a bit of an issue. They look at income after write offs. I drive 30k a year just for sales, at 53 cents a mile it adds up. They don't care that it's a 1500$ Honda lol.

But yes I can match my own contribution I believe.