Paying down a mortgage vs contributing to retirement account

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
HonBee
Posts: 60
Joined: Sat Sep 22, 2012 6:27 am

Paying down a mortgage vs contributing to retirement account

Post by HonBee »

I'm sure this topic has been discussed time eternal... and I've read a bit about it, different view points, but
thought I'd ask what the participants on this site might feel about this topic.

We are in our late fifties and built a house which we moved into 2 years ago. The land we inherited.
It is the house we intend to live in for the rest of our lives and plan on passing it on to our son (only child). Our mortgage is
160,000 (started at 180,000). Monthly mort payment is 1400 (about 850 prin and interest) balance makes up escrow. I pay an extra $1000
a month (principal payment) and if I keep that up, estimate the loan would be paid off in about 9 years.

Of course I can also take that $1000 a month and put it in my retirement account. The thought of not having a mortgage when I'm
in my late 60's is very appealing. Our current interest rate is 4.25% and it's a 30 year fixed rate loan.

I realize there are many other variables that could effect your insights.... but I'm just looking for general thoughts the people
on this forum may have for this type of scenario. Thanks a lot.... if I can offer any additional info, please let me know.
beardsworth
Posts: 2135
Joined: Fri Jun 15, 2007 4:02 pm

Re: Paying down a mortgage vs contributing to retirement acc

Post by beardsworth »

HonBee, others may be along to comment on your specific numbers, but it's also usually a good idea to use that "Search" box at the top of the page to check on similar discussions.

My quick search combining "retirement" and "mortgage" led to these previous threads which you might also find useful, though not identical to your situation.

http://www.bogleheads.org/forum/viewtop ... 2&t=102452

http://www.bogleheads.org/forum/viewtop ... =1&t=98812

http://www.bogleheads.org/forum/viewtopic.php?t=63450

Best wishes.
Xanadu
Posts: 250
Joined: Fri Sep 30, 2011 8:50 pm

Re: Paying down a mortgage vs contributing to retirement acc

Post by Xanadu »

I wouldn't even think about paying extra on my mortgage until I've at least maxed out 401k and roth ira at a minimum.
Johm221122
Posts: 5261
Joined: Fri May 13, 2011 6:27 pm

Re: Paying down a mortgage vs contributing to retirement acc

Post by Johm221122 »

How much are you putting in retirement accounts?
This money would not be matched by your company?
john
Onion
Posts: 101
Joined: Tue Sep 11, 2012 7:21 pm

Re: Paying down a mortgage vs contributing to retirement acc

Post by Onion »

I think a lot of it depends on whether you are maxing your retirement already. But, if you can always afford the higher payment, have you looked into a no-cost refinance to 10 or 15 years? You would save a lot of money with the lower rate.
BornInCA
Posts: 273
Joined: Tue Oct 26, 2010 8:40 pm

Re: Paying down a mortgage vs contributing to retirement acc

Post by BornInCA »

At a 30-year fixed rate 4.25%, I don't see the "wisdom" in sending extra payments or paying off the mortgage. Knowing that this is likely the lowest rate we can get in our lifetime (BTW, my mortgage is 4.5% 30-yr fixed), I hate to send extra payments or prepay a mortgage only to later have a need to take a home equity loan/line of credit at a higher rate of interest for emergency/home improvement reasons.

I feel that if you never ever have to take on any other debt during and after your mortgage payoff process, it will work just fine. Otherwise, the mortgage prepayment effort would be in vain.

But that's just my opinion!!! :wink:
SurfCityBill
Posts: 547
Joined: Tue May 01, 2012 10:15 pm

Re: Paying down a mortgage vs contributing to retirement acc

Post by SurfCityBill »

BornInCA wrote:
I feel that if you never ever have to take on any other debt during and after your mortgage payoff process, it will work just fine. Otherwise, the mortgage prepayment effort would be in vain.
+1
User avatar
grabiner
Advisory Board
Posts: 29103
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Paying down a mortgage vs contributing to retirement acc

Post by grabiner »

HonBee wrote:I'm sure this topic has been discussed time eternal... and I've read a bit about it, different view points, but
thought I'd ask what the participants on this site might feel about this topic.

We are in our late fifties and built a house which we moved into 2 years ago. The land we inherited.
It is the house we intend to live in for the rest of our lives and plan on passing it on to our son (only child). Our mortgage is
160,000 (started at 180,000). Monthly mort payment is 1400 (about 850 prin and interest) balance makes up escrow. I pay an extra $1000
a month (principal payment) and if I keep that up, estimate the loan would be paid off in about 9 years.
Consider refinancing to a 10-year mortgage. You are already paying enough to pay it off in 10 years, and the interest rate will be lower.
Of course I can also take that $1000 a month and put it in my retirement account. The thought of not having a mortgage when I'm
in my late 60's is very appealing. Our current interest rate is 4.25% and it's a 30 year fixed rate loan.
Do you deduct almost all the mortgage interest? (That is, if you paid off the mortgage, would you still itemize deductions because of charity, state taxes, and property taxes?) If you do, then the rate (particularly after refinancing) is probably low enough that it is better to contribute to your 401(k).
Wiki David Grabiner
User avatar
englishgirl
Posts: 2491
Joined: Thu Mar 01, 2007 5:34 pm
Location: FL

Re: Paying down a mortgage vs contributing to retirement acc

Post by englishgirl »

You haven't given us information about how much you are also saving for retirement. If it is nothing, then I think that is wrong, as I do think you should be saving something for retirement. If you're maxing out your retirement accounts, WTG! If, as is probably the case, you're somewhere inbetween, then it's a more complicated scenario.

Personally, part of my retirement planning IS to pay off my mortgage before I retire. Once it's gone, then my needed monthly expenses will go down, so I have to save a lot less. So, yes, at your age, I'd want to be aggressively making sure that I can get rid of the mortgage by my late 60's, as you're doing. Look into refinancing for that lower rate, as already mentioned. But unless you've got a cushy pension coming that will cover all your expenses and then some, please also put money into retirement accounts somehow. If this means dialing back the mortgage payments a bit, I'd do that.
Sarah
BornInCA
Posts: 273
Joined: Tue Oct 26, 2010 8:40 pm

Re: Paying down a mortgage vs contributing to retirement acc

Post by BornInCA »

Does it ever make sense to payoff a mortgage in your 50s and then (assuming you're still living in the same house) take a reverse mortgage on that home in your late 60s/early 70s?
rixer
Posts: 716
Joined: Tue Sep 11, 2012 4:18 pm

Re: Paying down a mortgage vs contributing to retirement acc

Post by rixer »

If you can pay down the mortgage at that rate and still fund your retirement, you're in great shape! Do it.

It's so much easier to retire when there is no mortgage to pay. I sent in extra over the years and retired my home mortgage. I'm thankful every day for doing so.
User avatar
hand
Posts: 1558
Joined: Sun May 17, 2009 8:42 pm

Re: Paying down a mortgage vs contributing to retirement acc

Post by hand »

BornInCA wrote:At a 30-year fixed rate 4.25%, I don't see the "wisdom" in sending extra payments or paying off the mortgage. Knowing that this is likely the lowest rate we can get in our lifetime (BTW, my mortgage is 4.5% 30-yr fixed), I hate to send extra payments or prepay a mortgage only to later have a need to take a home equity loan/line of credit at a higher rate of interest for emergency/home improvement reasons.

I feel that if you never ever have to take on any other debt during and after your mortgage payoff process, it will work just fine. Otherwise, the mortgage prepayment effort would be in vain.

But that's just my opinion!!! :wink:
FYI: Depending on location and financials, rates for a 30 yr fixed loan on a primary residence (assuming 80% LTV) are below $3.5% - you should consider refinancing!
Call_Me_Op
Posts: 8130
Joined: Mon Sep 07, 2009 2:57 pm
Location: Milky Way

Re: Paying down a mortgage vs contributing to retirement acc

Post by Call_Me_Op »

BornInCA wrote:At a 30-year fixed rate 4.25%, I don't see the "wisdom" in sending extra payments or paying off the mortgage.
That may be because you're not looking at every aspect of the issue - some of which are individualized. For example, there are important asset protection advantages to taking taxable money off of the table and paying-off a mortgage (if you live in a state with a good homestead exemption). That may not apply in this particular situation.

In this case, since the question being asked is retirement or mortgage pay-down, the money definitely be put toward retirement if there is a match, and probably if it is being placed in a tax-free or tax-deferred account. But if the retirement account is non-ERISA, the asset protection angle should be considered.

FYI, I paid-off my mortgage in my late 40's, and having done so seems to have put me in a much better financial position.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
trico
Posts: 684
Joined: Wed Nov 12, 2008 7:04 pm

Re: Paying down a mortgage vs contributing to retirement acc

Post by trico »

I paid off our mortgage in my 50's after paying a monthly payment for 20 years. I can tell you there are positive emotional aspects to having the mortgage monkey off of your back, weather it makes economic sense or not. I do think that with interest rates so low, paying it off makes more sense now as ever before. Because can you make the same amount of interest on your money risk free? So it is like borrowing money from a mortgage company at 4.75% interest, and putting it into a retirement account earning 2.67% (30yr treasury yield). So there you go my friend.
PacNorWest
Posts: 89
Joined: Mon Feb 22, 2010 11:07 pm

Re: Paying down a mortgage vs contributing to retirement acc

Post by PacNorWest »

I like your thinking.
The decision you question has to be based on if you can contribute to a qualified Roth or Traditional IRA or not.
I would stuff the Roth with every cent that I could first before paying down the mortgage.
Second would be to max out the Traditional IRA

When the qualified retirement plans are maxed out then simply do what you feel most comfortable with.

One last thought,
I've never heard anyone say that "I paid off my mortgage and am debt free and wish that I never done that."
User avatar
stemikger
Posts: 4950
Joined: Thu Apr 08, 2010 5:02 am

Re: Paying down a mortgage vs contributing to retirement acc

Post by stemikger »

HonBee wrote:I'm sure this topic has been discussed time eternal... and I've read a bit about it, different view points, but
thought I'd ask what the participants on this site might feel about this topic.

We are in our late fifties and built a house which we moved into 2 years ago. The land we inherited.
It is the house we intend to live in for the rest of our lives and plan on passing it on to our son (only child). Our mortgage is
160,000 (started at 180,000). Monthly mort payment is 1400 (about 850 prin and interest) balance makes up escrow. I pay an extra $1000
a month (principal payment) and if I keep that up, estimate the loan would be paid off in about 9 years.

Of course I can also take that $1000 a month and put it in my retirement account. The thought of not having a mortgage when I'm
in my late 60's is very appealing. Our current interest rate is 4.25% and it's a 30 year fixed rate loan.

I realize there are many other variables that could effect your insights.... but I'm just looking for general thoughts the people
on this forum may have for this type of scenario. Thanks a lot.... if I can offer any additional info, please let me know.
I didn't read the other replies yet, but I did this and I'm not sorry I did. I didn't stop contributing to my 401K, but I brought it down to 10% instead of maxing it out. I will be paying off my mortgage this year. Many people say save the money instead so it is liquid in case of a job loss, which I agree with. However, once you have enough money, I would pay it off immediately. If said job loss comes, you can get by on much less with a monthly mortgage as long as your property taxes are not too high. Heck, in my case, I could get by on unemployment if I have to, so I rather have no mortgage in such a case. Do what you feel in your heart and don't look back.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!
Tom_T
Posts: 1543
Joined: Wed Aug 29, 2007 2:33 pm

Re: Paying down a mortgage vs contributing to retirement acc

Post by Tom_T »

rixer wrote:If you can pay down the mortgage at that rate and still fund your retirement, you're in great shape! Do it.

It's so much easier to retire when there is no mortgage to pay. I sent in extra over the years and retired my home mortgage. I'm thankful every day for doing so.
For some people, the question of paying down the mortgage is strictly mathematical. For others, retirement is difficult, maybe even impossible, when there's still a mortgage to pay.

I do agree that a Roth should be funded before paying down the mortgage. At the very least, you can withdraw the Roth contributions someday if you want to make a lump-sum payment towards the mortgage, without worrying about paying taxes on the withdrawal.
Topic Author
HonBee
Posts: 60
Joined: Sat Sep 22, 2012 6:27 am

Re: Paying down a mortgage vs contributing to retirement acc

Post by HonBee »

Hi all.... OP here. I wanted to thank you all for your comments and insights.
As originally stated, not having mortgage payments in 9 or 10 years when i'm in my
late 60's is very appealing. My situation now however (as I read all your comments) is that
my funding to my retirement accounts is falling short due to my extra payments to the mortgage.
So that is making me rethink this strategy. I looked at mortgage interest rates today, and I'm considering
refinancing to a 15 year mortgage which would bring my current 4.25 rate to about 2.8785. I wouldn't continue
to send extra $$ to the principal, but would put what I could into the retirement accounts. I figure by the time
I'm 68 I'd have a mortgage balance of about 60,000 (it's 160,000 now) and if I didn't want to have a mortgage at that point, I could
just pay it off from the funds in my retirement account. Lots to consider, but thank you all again.
Johm221122
Posts: 5261
Joined: Fri May 13, 2011 6:27 pm

Re: Paying down a mortgage vs contributing to retirement acc

Post by Johm221122 »

HonBee wrote:Hi all.... OP here. I wanted to thank you all for your comments and insights.
As originally stated, not having mortgage payments in 9 or 10 years when i'm in my
late 60's is very appealing. My situation now however (as I read all your comments) is that
my funding to my retirement accounts is falling short due to my extra payments to the mortgage.
So that is making me rethink this strategy. I looked at mortgage interest rates today, and I'm considering
refinancing to a 15 year mortgage which would bring my current 4.25 rate to about 2.8785. I wouldn't continue
to send extra $$ to the principal, but would put what I could into the retirement accounts. I figure by the time
I'm 68 I'd have a mortgage balance of about 60,000 (it's 160,000 now) and if I didn't want to have a mortgage at that point, I could
just pay it off from the funds in my retirement account. Lots to consider, but thank you all again.
Taking $60,000 all at one time is a lot of taxes,most of us are trying to pay as little tax as possible in retirement
john
rixer
Posts: 716
Joined: Tue Sep 11, 2012 4:18 pm

Re: Paying down a mortgage vs contributing to retirement acc

Post by rixer »

HonBee wrote:Hi all.... OP here. I wanted to thank you all for your comments and insights.
As originally stated, not having mortgage payments in 9 or 10 years when i'm in my
late 60's is very appealing. My situation now however (as I read all your comments) is that
my funding to my retirement accounts is falling short due to my extra payments to the mortgage.
So that is making me rethink this strategy. I looked at mortgage interest rates today, and I'm considering
refinancing to a 15 year mortgage which would bring my current 4.25 rate to about 2.8785. I wouldn't continue
to send extra $$ to the principal, but would put what I could into the retirement accounts. I figure by the time
I'm 68 I'd have a mortgage balance of about 60,000 (it's 160,000 now) and if I didn't want to have a mortgage at that point, I could
just pay it off from the funds in my retirement account. Lots to consider, but thank you all again.
That works for many but I still like the idea of a 30 year loan and prepaying it as you go. This way if financial problems arise, you're not stuck with a much higher mortgage payment that you get with a 15 year loan.
Austintatious
Posts: 878
Joined: Thu Sep 13, 2012 7:01 pm

Re: Paying down a mortgage vs contributing to retirement acc

Post by Austintatious »

For what it's worth, my HonBee(59) and I(66) thought long and hard about the very same choice you're struggling with now, HonBee, and we decided to opt for paying off the note, despite the fact that it meant diverting some of the cash we might otherwise have been putting into a 401K) or an IRA. Whether or not that was a mistake for us is yet to be ultimately determined but, barring some unforeseen event, we 'll be free and clear of the note in two months, having paid off a 20 year note in 10 years and 3 mos. To date, at least, we've not regretted our decision for a moment. Someone posting earlier rightly mentioned the peace of mind of owning one's home free and clear. It's true, especially as one approaches on'e so called retirement years, if there's such a thing anymore. We concluded that a severe and prolonged market decline and the affects such an event would have on our investments for retirement would be much easier to weather if we owned our home/farm free and clear. Another thing we considered was that the money we might have invested, instead of paying it on the note, would have been invested fairly late in our savings career, so that we would not have benefited from the magic of compounding anywhere close to how we might have had it been invested when we were younger.

I should disclose that I am anything but an expert on investing or on money matters, in general. While I'm relatively new to this web site, I am covinced that many posting here and that there are many psoting on this web site who are far more knowledgeable than am I. Certainly, I cannot tell assure you that, from the best overall monetary perspective, we've made the right decision.

Good luck to you and yours.
BornInCA
Posts: 273
Joined: Tue Oct 26, 2010 8:40 pm

Re: Paying down a mortgage vs contributing to retirement acc

Post by BornInCA »

Call_Me_Op wrote:
BornInCA wrote:At a 30-year fixed rate 4.25%, I don't see the "wisdom" in sending extra payments or paying off the mortgage.
That may be because you're not looking at every aspect of the issue - some of which are individualized. For example, there are important asset protection advantages to taking taxable money off of the table and paying-off a mortgage (if you live in a state with a good homestead exemption). That may not apply in this particular situation.

In this case, since the question being asked is retirement or mortgage pay-down, the money definitely be put toward retirement if there is a match, and probably if it is being placed in a tax-free or tax-deferred account. But if the retirement account is non-ERISA, the asset protection angle should be considered.
That's an interesting point :!: Homestead exemption laws vary from state to state. I have to concede that mortgage payoff to shield assets from Medicaid is a strategy worth carefully considering. I don't know whether or not Medicaid can bypass homestead exemption laws. Perhaps an elder law attorney would know this. Even then, who says today's laws are written in stone?
Call_Me_Op wrote:FYI, I paid-off my mortgage in my late 40's, and having done so seems to have put me in a much better financial position.
I suppose that if someone got a mortgage in the 80s, then paid it off by the mid 90s, and then obtained a home equity loan/line of credit sometime in the last 4 years at a low interest rate (because he/she needed to...), I would call him/her lucky to have paid off a high interest debt and then take a low interest debt later in life. With 20/20 hindsight, it would have been a good move. :wink:
jdilla1107
Posts: 849
Joined: Sun Jun 24, 2012 8:31 pm

Re: Paying down a mortgage vs contributing to retirement acc

Post by jdilla1107 »

These discussions always make me think, how does it make sense to own any bonds (which are paying under 2%) when you are paying over 4% on a mortgage? Mortgage rates that you pay will always be higher than what you can earn from bonds. I couldn't stomach owning bonds like this as it's borrow high, lend cheap.

If people are 100% equities, I guess I can see it, but that's leveraging up pretty hard and can be risky.

Another way to look at it.... Say your house was paid off. Would you drive down to the bank and take out a loan to go invest? (Most people wouldn't, but not pre-paying your mortgage is the same thing.)
BornInCA
Posts: 273
Joined: Tue Oct 26, 2010 8:40 pm

Re: Paying down a mortgage vs contributing to retirement acc

Post by BornInCA »

jdilla1107 wrote:These discussions always make me think, how does it make sense to own any bonds (which are paying under 2%) when you are paying over 4% on a mortgage? Mortgage rates that you pay will always be higher than what you can earn from bonds. I couldn't stomach owning bonds like this as it's borrow high, lend cheap.

If people are 100% equities, I guess I can see it, but that's leveraging up pretty hard and can be risky.
Sounds like the assumption is interest rates will NEVER rise. There was a time that CDs were paying 6% or more. if you took out a 30-year fixed rate mortgage today and you made the required payments, your mortgage rate or payments cannot rise even if prevailing interest rates rise elsewhere. I can't imagine interest rates going further down or staying the same for the next 30 years.
jdilla1107 wrote:Another way to look at it.... Say your house was paid off. Would you drive down to the bank and take out a loan to go invest? (Most people wouldn't, but not pre-paying your mortgage is the same thing.)
I beg to differ on this line here.... I'd strongly say it's the wrong way to look at it....
jdilla1107
Posts: 849
Joined: Sun Jun 24, 2012 8:31 pm

Re: Paying down a mortgage vs contributing to retirement acc

Post by jdilla1107 »

BornInCA wrote: Sounds like the assumption is interest rates will NEVER rise. There was a time that CDs were paying 6% or more. if you took out a 30-year fixed rate mortgage today and you made the required payments, your mortgage rate or payments cannot rise even if prevailing interest rates rise elsewhere. I can't imagine interest rates going further down or staying the same for the next 30 years.
So you're shorting the market. Cool, hope that works out for you.

But you're not really shorting the market because you also own bonds. You have some goofy negative cash flow spread on.
jdilla1107 wrote:Another way to look at it.... Say your house was paid off. Would you drive down to the bank and take out a loan to go invest? (Most people wouldn't, but not pre-paying your mortgage is the same thing.)
BornInCA wrote:I beg to differ on this line here.... I'd strongly say it's the wrong way to look at it....
How is it different?
BornInCA
Posts: 273
Joined: Tue Oct 26, 2010 8:40 pm

Re: Paying down a mortgage vs contributing to retirement acc

Post by BornInCA »

jdilla1107 wrote:
BornInCA wrote: Sounds like the assumption is interest rates will NEVER rise. There was a time that CDs were paying 6% or more. if you took out a 30-year fixed rate mortgage today and you made the required payments, your mortgage rate or payments cannot rise even if prevailing interest rates rise elsewhere. I can't imagine interest rates going further down or staying the same for the next 30 years.
So you're shorting the market. Cool, hope that works out for you.

But you're not really shorting the market because you also own bonds. You have some goofy negative cash flow spread on.
Shorting The Market? No Way!! Jdilla1107 stated in the earlier post that all bonds pay under 2%. Granted, there are lots of bonds today that pay under 2%, especially Treasuries. But you can get bonds that pay more with higher risk, like high yield bonds. My point is not to stretch for yield. My point is that the statement "all bonds pay under 2%" is false.

In the short term, jdilla1107 would be right that holding short-term government bonds instead of pre-paying a mortgage is negative cash flow. But I emphasize "the short term only."

Interest rates may or may not go up for 2 years. They may or may not even go up for 5 years. But to say that interest rates won't ever go up in the next 30 years is a stretch and that's not a bet I'm willing to make. I believe they will go up at some point in the 30 years. I cannot predict the timing or the magnitude of the interest rate movements.
jdilla1107 wrote:
jdilla1107 wrote:Another way to look at it.... Say your house was paid off. Would you drive down to the bank and take out a loan to go invest? (Most people wouldn't, but not pre-paying your mortgage is the same thing.)
BornInCA wrote:I beg to differ on this line here.... I'd strongly say it's the wrong way to look at it....
How is it different?
Jdilla1107 stated "take out a loan to go invest". "Mortgage" and "loan" are NOT synonymous. A mortgage is a loan just like a banana is a fruit. Loans could be "personal loans" or "credit card loans". I remember one guy who loves the idea of pre-paying a mortgage and was so enthusiastic about it. While he's happy to go from a 30-year mortgage to a 20-year mortgage, he also revealed he's carrying credit card debt as well. Does Jdilla1107 or anyone think that this guy is doing the right thing financially?

Most posters/readers of Bogleheads don't like the idea of carrying any form of debt which I understand and respect. What I hate more is to get rid of low interest debt and then end up taking debt at a higher rate of interest due to unanticipated/unforeseen expenses.

With the current interest rate environment so low, I think that the mortgage payoff should be a "Get Out and Stay Out" deal. "Getting Out" would be sending extra mortgage payments every month until the mortgage is paid off. "Staying Out" is that once the mortgage is paid off, that person SHALL NEVER take on any form of debt for the rest of his/her life.

Low interest rates are good for borrowers (responsible borrowers only) and bad for savers.
High interest rates are bad for borrowers and good for savers.
usorry
Posts: 40
Joined: Mon Sep 10, 2012 11:36 am

Re: Paying down a mortgage vs contributing to retirement acc

Post by usorry »

BornInCA wrote:At a 30-year fixed rate 4.25%, I don't see the "wisdom" in sending extra payments or paying off the mortgage. Knowing that this is likely the lowest rate we can get in our lifetime (BTW, my mortgage is 4.5% 30-yr fixed)...
Not true. 30yr rates are at 3.375.
BornInCA
Posts: 273
Joined: Tue Oct 26, 2010 8:40 pm

Re: Paying down a mortgage vs contributing to retirement acc

Post by BornInCA »

usorry wrote:
BornInCA wrote:At a 30-year fixed rate 4.25%, I don't see the "wisdom" in sending extra payments or paying off the mortgage. Knowing that this is likely the lowest rate we can get in our lifetime (BTW, my mortgage is 4.5% 30-yr fixed)...
Not true. 30yr rates are at 3.375.
Well the OP said their mortgage is 4.25%. Regardless of whether the interest rate is 3.375%, 4.25%, or 4.5% for a 30-year fixed rate mortgage, it's likely to be the lowest 30-year fixed mortgage rate we will have in our lifetime. Does it make sense to refinance to a mortgage rate of 3.375% if one is carrying a 4.5% mortgage? It depends on what the closing costs would be and how much lower your monthly payments would be. From those 2 numbers, you can derive your "break even" period to your savings. If you keep the new loan past the "break even" period, then it's a good idea to refinance.
User avatar
Watty
Posts: 21767
Joined: Wed Oct 10, 2007 3:55 pm

Re: Paying down a mortgage vs contributing to retirement acc

Post by Watty »

..Paying down a mortgage vs contributing to retirement account..
If it were not for taxes then either paying down the mortgage by $1,000 or putting $1,000 into a retirement account would increase your net worth by $1,000 so this is not an easy one size fits all decision. In the retirment account the taxes are just deferred, and not actually avoided so the actual tax saving are hard to calculate.

My situation is somewhat similar to yours and what I decided to do last year was to refinance with the PenFed no cost 5/5 ARM and have it paid off in about seven years, maybe less.

https://www.penfed.org/55-Adjustable-Rate-Mortgage/

This mortage is currently at 2.75% and will be locked for five years and after that the highest it can go for the next five years is +2 points to 4.75%. With this you would save so much in the first five years that compared to your current loan it would you would be better off for well past the ten or maybe even the 15 year mark especially if you kept your current payment levels.

In my case when the mortgage is paid off the home equity will be less that 25% of my net worth and it would be a hard pinch but I would still be OK with the mortgage if I were forced to retire early tomorrow. This mortage is calculated as a 30 year loan so the required payment for me is very low so I could cut back to the minimum payment if I needed to.

It would also be good to crunch the numbers for PenFed's 5 year 1.99% home equity loan to see if that would be a doable way to get the mortage paid off in file years. This would be pretty aggessive but it might be doable.

These may very well not be a good choice for you but you should refinance to a lower interest rate one way or the other.
jdilla1107
Posts: 849
Joined: Sun Jun 24, 2012 8:31 pm

Re: Paying down a mortgage vs contributing to retirement acc

Post by jdilla1107 »

BornInCA wrote: But to say that interest rates won't ever go up in the next 30 years is a stretch and that's not a bet I'm willing to make.
But, in 30 years your mortgage balance will be zero. In 25 years, it will be so small that it hardly matters. In 20 years, it's getting pretty small.

Also, you will have to bank on that:

- You don't move
- You don't want to upsize/downsize
- You don't want to pay it off later

I agree with the stay out/get out thoughts.

My only real point was that if you have a large mortgage and are 60/40 stocks/bonds, consider that your mortgage to bonds cash flow is probably negative. If it's not negative you are taking leveraged risk
letsgobobby
Posts: 12073
Joined: Fri Sep 18, 2009 1:10 am

Re: Paying down a mortgage vs contributing to retirement acc

Post by letsgobobby »

I would not prepay unless you have several multiples of your mortgage debt already available in taxable investments. Or something like that (high liquid net worth relative to mortgage debt, etc).

That said, you should refinance. 4.25% is above market rates right now. If you want to split the difference between prepaying a 30 year in 9 years or not, get a 15 year mortgage for 3% or less.
Default User BR
Posts: 7501
Joined: Mon Dec 17, 2007 7:32 pm

Re: Paying down a mortgage vs contributing to retirement acc

Post by Default User BR »

jdilla1107 wrote:Another way to look at it.... Say your house was paid off. Would you drive down to the bank and take out a loan to go invest? (Most people wouldn't, but not pre-paying your mortgage is the same thing.)
I am in the process of doing exactly that. I have a home-equity loan from PenFed in the works.


Brian
harikaried
Posts: 1512
Joined: Fri Mar 09, 2012 3:47 pm

Re: Paying down a mortgage vs contributing to retirement acc

Post by harikaried »

BornInCA wrote:Does it make sense to refinance to a mortgage rate of 3.375% if one is carrying a 4.5% mortgage?
The numbers from the original post seem to indicate $1850 in principal and interest payments. At the current 4.25% rate, it'll be paid off in 104 months with ~$31k more interest payments to the bank. At 3.375% with the same $1850/mo payments, it'll be paid off in 100 months with ~$23k interest, so saves $8k and allows future additional savings a few months earlier.

If OP is willing to reduce flexibility on whether or not to make these extra principal payments, 15-yr fixed at 2.75%, the monthly payments would be at least ~$1100 -- still less than $1850. Continuing at $1850/mo, total interest is ~$18k in 97 months, so total $13k saved and half a year earlier.
Topic Author
HonBee
Posts: 60
Joined: Sat Sep 22, 2012 6:27 am

Re: Paying down a mortgage vs contributing to retirement acc

Post by HonBee »

OP here.....
I just found a local bank that is offering a 15 year refinance at 2.625 interest rate, no points. My principal and
interest payment would go up $190 a month. If I send in $200 a month extra I'd have the house paid off in 12 years. So now I'm NOT sending
$1000 every month to principal (as is currently the case and to the detriment of not fully funding my retirement accounts) but I'm coming up
with $190 (from going from 30 year loan to 15) + 200 (the extra I'd send in to principal in effort to pay off in 12 years, not 15)....
and with any extra money I have during the month, that can go into the retirement accounts.

So now I'm still paying off the mortgage while in my late 60's... .and sending $$ to fund the retirement accounts.

Any opinions, insights on this. I'm in the process of rethinking my entire financial life.... and this seems like good scenario to me...just looking to
bounce this off whoever would like to share any comments. Thank you.
Johm221122
Posts: 5261
Joined: Fri May 13, 2011 6:27 pm

Re: Paying down a mortgage vs contributing to retirement acc

Post by Johm221122 »

HonBee wrote:OP here.....
I just found a local bank that is offering a 15 year refinance at 2.625 interest rate, no points. My principal and
interest payment would go up $190 a month. If I send in $200 a month extra I'd have the house paid off in 12 years. So now I'm NOT sending
$1000 every month to principal (as is currently the case and to the detriment of not fully funding my retirement accounts) but I'm coming up
with $190 (from going from 30 year loan to 15) + 200 (the extra I'd send in to principal in effort to pay off in 12 years, not 15)....
and with any extra money I have during the month, that can go into the retirement accounts.

So now I'm still paying off the mortgage while in my late 60's... .and sending $$ to fund the retirement accounts.

Any opinions, insights on this. I'm in the process of rethinking my entire financial life.... and this seems like good scenario to me...just looking to
bounce this off whoever would like to share any comments. Thank you.
Your definitely on the right track
John
User avatar
grabiner
Advisory Board
Posts: 29103
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Paying down a mortgage vs contributing to retirement acc

Post by grabiner »

HonBee wrote:OP here.....
I just found a local bank that is offering a 15 year refinance at 2.625 interest rate, no points. My principal and
interest payment would go up $190 a month. If I send in $200 a month extra I'd have the house paid off in 12 years. So now I'm NOT sending
$1000 every month to principal (as is currently the case and to the detriment of not fully funding my retirement accounts) but I'm coming up
with $190 (from going from 30 year loan to 15) + 200 (the extra I'd send in to principal in effort to pay off in 12 years, not 15)....
and with any extra money I have during the month, that can go into the retirement accounts.
That's a good deal, but I wouldn't even bother with making extra payments for an early payoff. It will take you 12 years to get any benefit from the early payoff, and you can get 12 years of tax-free compounded growth by contributing to your retirement accounts instead. (After those 12 years, when you are retired, you could choose to pay off the mortgage with an IRA withrawal.)
Wiki David Grabiner
ShortInSeattle
Posts: 45
Joined: Sat May 05, 2012 8:18 pm

Re: Paying down a mortgage vs contributing to retirement acc

Post by ShortInSeattle »

Thanks for the ideas everyone.

Our thinking has been evolving on this subject, and we are going to pay down our 30 year mortgage at a 15 year rate.

Why not get a 15 year loan? We like the flexibility of a low payment to drop back to in case of job loss or emergency.

Why not invest it instead? We are already maximizing all tax-deferred options as well as contributing to taxable accounts. We're on track on the savings front. Now we like the idea of playing defense by reducing our retirement expenses at the same time we pay off the mortgage.

If we're lucky enough to stay healthy and employed, we'll be mortgage free right at our retirement date. A happy thought!

SIS
User avatar
grabiner
Advisory Board
Posts: 29103
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Paying down a mortgage vs contributing to retirement acc

Post by grabiner »

ShortInSeattle wrote:Thanks for the ideas everyone.

Our thinking has been evolving on this subject, and we are going to pay down our 30 year mortgage at a 15 year rate.

Why not get a 15 year loan? We like the flexibility of a low payment to drop back to in case of job loss or emergency.

Why not invest it instead? We are already maximizing all tax-deferred options as well as contributing to taxable accounts.
If you have taxable accounts, then you don't need this flexibility, as you can always sell your taxable accounts to make the payments. (And you can do this without reducing your stock allocation, even if the taxable accounts are all stock; see Placing Cash Needs in a Tax-Advantaged Account on the wiki.)

Thus I would recommend refinancing for the benefit of the lower interest rate.



We're on track on the savings front. Now we like the idea of playing defense by reducing our retirement expenses at the same time we pay off the mortgage.

If we're lucky enough to stay healthy and employed, we'll be mortgage free right at our retirement date. A happy thought!

SIS[/quote]
Wiki David Grabiner
User avatar
DiscoBunny1979
Posts: 2042
Joined: Sun Oct 21, 2007 10:59 am

Re: Paying down a mortgage vs contributing to retirement acc

Post by DiscoBunny1979 »

BornInCA wrote:
Call_Me_Op wrote:
BornInCA wrote:At a 30-year fixed rate 4.25%, I don't see the "wisdom" in sending extra payments or paying off the mortgage.
That may be because you're not looking at every aspect of the issue - some of which are individualized. For example, there are important asset protection advantages to taking taxable money off of the table and paying-off a mortgage (if you live in a state with a good homestead exemption). That may not apply in this particular situation.

In this case, since the question being asked is retirement or mortgage pay-down, the money definitely be put toward retirement if there is a match, and probably if it is being placed in a tax-free or tax-deferred account. But if the retirement account is non-ERISA, the asset protection angle should be considered.
That's an interesting point :!: Homestead exemption laws vary from state to state. I have to concede that mortgage payoff to shield assets from Medicaid is a strategy worth carefully considering. I don't know whether or not Medicaid can bypass homestead exemption laws. Perhaps an elder law attorney would know this. Even then, who says today's laws are written in stone?
Call_Me_Op wrote:FYI, I paid-off my mortgage in my late 40's, and having done so seems to have put me in a much better financial position.
I suppose that if someone got a mortgage in the 80s, then paid it off by the mid 90s, and then obtained a home equity loan/line of credit sometime in the last 4 years at a low interest rate (because he/she needed to...), I would call him/her lucky to have paid off a high interest debt and then take a low interest debt later in life. With 20/20 hindsight, it would have been a good move. :wink:
-----------------

In my responses to previous threads I've indicated why having equity in a Primary Residence In California might actually be a better strategy than having money protected in an IRA. The Homestead status in California not only shields up to $100,000 in equity from lawsuits and bankruptcy, but since California has MediCal, not MediCaid, the state writes its own guidelines in terms of who can qualify for state assistance for state programs. For MediCal, one can own their own home (of any value) and still qualify for MediCal providing they have limited assets in other areas (limits to car value and limits to cash on hand/bank accounts). One can also own household items without it impacting MediCal eligability.

From my reading, and I could be wrong, one can qualify for MediCal and own an IRA if that IRA is having steady withdrawls being made. That means that that money being withdrawn would then be added to income to see if the total income 'qualifies' for MediCal on an 'income' basis/share of cost. So, I would do both - have a simple house somewhere in Calfiornia and a retirement account.
User avatar
Peter Foley
Posts: 5237
Joined: Fri Nov 23, 2007 10:34 am
Location: Lake Wobegon

Re: Paying down a mortgage vs contributing to retirement acc

Post by Peter Foley »

I personally would do the loan refinance. If I got your numbers correctly, your costs would go up $200/month. You are currently making extra payments of $1000/month so you now have $800/month to redirect. Because the early payments on a mortage are mostly interest, I would fund the Roth with 50% of the savings and pay down the principal balance with the other 50%. If you can do that for 3 to 5 years you should be able to shorten your mortgage term by a few years. (I'm sure there is an on line calculator that can give you exact numbers.) I'm all for paying off a mortgage early, I did, but I wouldn't want to lose valuable saving space in a Roth - especially if I thought my taxes were going to be higher when I reached 70 1/2.
User avatar
bertilak
Posts: 8145
Joined: Tue Aug 02, 2011 5:23 pm
Location: East of the Pecos, West of the Mississippi

Re: Paying down a mortgage vs contributing to retirement acc

Post by bertilak »

grabiner wrote:... when you are retired, you could choose to pay off the mortgage with an IRA withrawal.
Might be a good place to put those Required Minimum Distributions. If you gotta take it from the (traditional) IRA anyway, might as well "invest" it in the mortgage payoff.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
User avatar
grabiner
Advisory Board
Posts: 29103
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Paying down a mortgage vs contributing to retirement acc

Post by grabiner »

bertilak wrote:
grabiner wrote:... when you are retired, you could choose to pay off the mortgage with an IRA withrawal.
Might be a good place to put those Required Minimum Distributions. If you gotta take it from the (traditional) IRA anyway, might as well "invest" it in the mortgage payoff.
The OP won't be old enough for RMDs when he retires, although that is certainly a good strategy if appropriate; it's usually better to pay down a mortgage than to leave money in your taxable account.

My suggestion is actually slightly different. Just as you make the decision whether you would rather contribute to the IRA or pay down a mortgage while you are working, you can make the decision whether you would rather leave money in the IRA or pay down the mortage after you retire. If you have five years left on your mortgage when you retire, you can take the payments out of your IRA every year for five years, or you can take slightly less than five times as much immediately and pay off the whole thing. (If you have a traditional IRA, the best strategy would probably be to withdraw from the IRA up to the top of the current tax bracket, spreading the payoff over several years; it's much better to withdraw $20,000 this year and $21,000 next year both taxed at 15% than to withdraw $40,000 this year half taxed at 15% and half taxed at 25%.)
Wiki David Grabiner
Post Reply