Author Topic: Pay off mortgage or invest instead?  (Read 2436 times)

engineermom21

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Pay off mortgage or invest instead?
« on: July 07, 2016, 12:02:42 PM »
So I'm updating our budget after a recent pay increase at work, and as I'm playing around with the numbers, I think we could pay off our mortgage in about 7 years if we are aggressive with it.  Aggressive meaning putting what would go into our HSA and my Roth IRA each year towards the mortgage instead.  I would still put the minimum amount into my 401K to get company match (4%) but no more than that.  When I ran the numbers, we would pay off the house in a little over 7 years.  If we throw me expected bonuses and our tax return at it as well, that would probably knock of another year or so.  BUT, this would reduce the amount of money put into my 401K, IRA, and any other investments during that time.

Curious to hear what others would do in this situation.  I would LOVE to have a paid off house by my mid-to-late 30s, but also know that this time is critical in terms of growing our retirement accounts. 

More helpful background info: 

Salary is around $108K with bonus
Amount left on mortgage is $188K @3.875%
Current 401K, HSA, and IRA balances are around $50K (combined)
My age is 31
« Last Edit: July 07, 2016, 12:10:34 PM by engineermom21 »

MrDelane

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Re: Pay off mortgage or invest instead?
« Reply #1 on: July 07, 2016, 12:05:05 PM »
You've left out one key piece of information - what is the interest rate on your mortgage?

tonysemail

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Re: Pay off mortgage or invest instead?
« Reply #2 on: July 07, 2016, 12:10:46 PM »
I would double check the math from a tax perspective.
it sounds like a double whammy to me.
Your AGI will be higher and soon you won't have much mortgage deduction.

Is your mortgage fixed rate?
with rates at an all time low, I would not be in a rush to pay it off.

engineermom21

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Re: Pay off mortgage or invest instead?
« Reply #3 on: July 07, 2016, 12:11:02 PM »
You've left out one key piece of information - what is the interest rate on your mortgage?

Yeah, I guess that would be helpful, huh?  Updated my original post with that info.  It's 3.875%

engineermom21

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Re: Pay off mortgage or invest instead?
« Reply #4 on: July 07, 2016, 12:14:26 PM »
I would double check the math from a tax perspective.
it sounds like a double whammy to me.
Your AGI will be higher and soon you won't have much mortgage deduction.

Is your mortgage fixed rate?
with rates at an all time low, I would not be in a rush to pay it off.

Yup - mortgage is fixed rate.  We are less than 2 years into it as well, if that matters. We also have a rental house with a mortgage that will still help from a tax perspective, though the rental income does reduce that quite a bit.

MrDelane

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Re: Pay off mortgage or invest instead?
« Reply #5 on: July 07, 2016, 12:17:32 PM »
Yeah, I guess that would be helpful, huh?  Updated my original post with that info.  It's 3.875%

My two cents (being in a somewhat similar situation with a mortgage at 3.75%) I wouldn't do it.
I would only pay extra towards the mortgage AFTER you have maxed out your 401K, Roth and HSA options.  If after that you find that you still have savings left over then feel free to pay extra towards it. 

I know its tempting, but personally I don't think its worth the opportunity cost of missing out on tax advantaged contributions.  No matter how much money it frees up in 7 years, you'll have missed out on the potential for $126000 worth of contributions to your 401K alone (nevermind the compounding growth of those contributions).

Also, keep in mind that if anything were to happen to you and you wind up unable to make payments in the future, the bank doesn't care that you paid above and beyond in the past... they only care that you make your monthly payment.  Personally I'm a big fan of putting your extra payments into an account and then paying off the entire mortgage at once when you have the funds.

Like I said, just my 2 cents.

tonysemail

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Re: Pay off mortgage or invest instead?
« Reply #6 on: July 07, 2016, 12:19:25 PM »
I don't think the math would be particularly close.
what's your effective tax rate?  18%?
There's no way it makes sense to pay 18% taxes so that you can pay off 3.8% loan faster.

neo von retorch

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Re: Pay off mortgage or invest instead?
« Reply #7 on: July 07, 2016, 12:20:49 PM »
I would LOVE to have a paid off house by my mid-to-late 30s, but also know that this time is critical in terms of growing our retirement accounts.

Depending on your long term plans, you could avoid a lot of tax.
Retire Even Earlier Without Earning More or Spending Less
Do that by taking advantage of that HSA and 401K as much as possible. Do you pay income tax at your income level? Is it more than 3.875%?

Then take into consideration that investments (in retirement funds) will likely also exceed 4% over a long enough timeline, and you'll realize that having a paid off house is not nearly as amazing as having really big (and growing fast) investment accounts.

Also remember that you're only paying off the principal on the mortgage. You'll still have taxes, insurance, maintenance and other housing costs. So you get to have a little more cash flow each month after that mortgage is paid off, but you save much less in interest than you could have saved on taxes and made on investments. Financially, it's probably a pretty bad choice. Emotionally, it might be nice, but having enough in your retirement/investment accounts to easily pay off the mortgage seven years from now, and then have a bunch of padding on top of that? I think that would be pretty emotionally satisfying, too!

TVRodriguez

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Re: Pay off mortgage or invest instead?
« Reply #8 on: July 07, 2016, 12:38:02 PM »
We paid our mortgage off in 10 years.  I like having no mortgage.  We do have to pay taxes and insurance, and maintaining a house always costs something.  We had refinanced within 7 years of purchase from a 5.6% to a 3.4% rate, but we both dislike debt of any kind.

That said, I never went a year without funding retirement accounts as much as I could before pre-paying much of the mortgage.  That meant that we had at least one fully funded 401k each year (other years we had SEP IRAs).  I would not forgo retirement funding or even drop it to 4% just to prepay a mortgage. 

engineermom21

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Re: Pay off mortgage or invest instead?
« Reply #9 on: July 07, 2016, 01:10:11 PM »
Thank you all for your feedback.  As much as I would love to be completely debt free (in terms of the mortgage), I would rather make the choice that makes the most sense financially, and I think that is going to be fully funding retirement accounts.   Nice to have some reassurance that this is the better decision!