Pay extra on mortage if I'm already maxing 401k and Roth?

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bigtex
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Pay extra on mortage if I'm already maxing 401k and Roth?

Post by bigtex » Fri Sep 28, 2018 3:47 pm

Hello all,

I'll make this short and sweet. I already max my 401k and Roth contributions. I have a fully funded emergency fund as well. Is it smart to now send any extra funds towards my mortgage at this point? The mortgage is my only debt, and I owe 127k on it. 3.75% interest rate. 12 years left if I only made the regular payment. Thoughts?

bradpevans
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Re: Pay extra on mortage if I'm already maxing 401k and Roth?

Post by bradpevans » Fri Sep 28, 2018 3:50 pm

bigtex wrote:
Fri Sep 28, 2018 3:47 pm
Hello all,

I'll make this short and sweet. I already max my 401k and Roth contributions. I have a fully funded emergency fund as well. Is it smart to now send any extra funds towards my mortgage at this point? The mortgage is my only debt, and I owe 127k on it. 3.75% interest rate. 12 years left if I only made the regular payment. Thoughts?
Do you have access to after tax 401 / Mega back door Roth?

How much do you have in taxable?

If you had the mortgage paid off, where would you direct the money then?

Olemiss540
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Re: Pay extra on mortage if I'm already maxing 401k and Roth?

Post by Olemiss540 » Fri Sep 28, 2018 4:31 pm

Will you meet your retirement goals by strictly maxing out your 401k/Roth? No point in considering unless you are on path with regards to your projected nest egg and retirement age.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

Better2bWise
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Re: Pay extra on mortage if I'm already maxing 401k and Roth?

Post by Better2bWise » Fri Sep 28, 2018 4:42 pm

If you know that you will pay the mortgage off in 10 years. Invest it in after tax mutual fund and once you get enough money to pay off in full after long term capital gains. Pull the trigger and pay it off. It is a gamble but it might pay off better over a longer term.

Grt2bOutdoors
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Re: Pay extra on mortage if I'm already maxing 401k and Roth?

Post by Grt2bOutdoors » Fri Sep 28, 2018 4:48 pm

If you took the money and invested it, you should invest it in a fund that is of an equal duration ~ 5 to 6 years. That is an investment grade bond fund and it should yield at least 3.75% but I would prefer more since there is investment risk with a bond fund in a rising rate environment. When you accumulate enough money you could then elect to payoff the mortgage. There is no risk in prepaying the mortgage (if you have other means of liquidity).
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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FiveK
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Re: Pay extra on mortage if I'm already maxing 401k and Roth?

Post by FiveK » Fri Sep 28, 2018 10:33 pm

bigtex wrote:
Fri Sep 28, 2018 3:47 pm
I already max my 401k and Roth contributions. I have a fully funded emergency fund as well. Is it smart to now send any extra funds towards my mortgage at this point? The mortgage is my only debt, and I owe 127k on it. 3.75% interest rate. 12 years left if I only made the regular payment. Thoughts?
If you don't pay extra on the mortgage, in what will you invest those extra funds? What do you expect for a return on that investment?

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grabiner
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Re: Pay extra on mortage if I'm already maxing 401k and Roth?

Post by grabiner » Fri Sep 28, 2018 10:35 pm

bigtex wrote:
Fri Sep 28, 2018 3:47 pm
I'll make this short and sweet. I already max my 401k and Roth contributions. I have a fully funded emergency fund as well. Is it smart to now send any extra funds towards my mortgage at this point? The mortgage is my only debt, and I owe 127k on it. 3.75% interest rate. 12 years left if I only made the regular payment. Thoughts?
Wiki article link: Paying down loans versus investing You should compare paying down the mortgage to investing in low-risk bonds of the same duration, as you can choose how much risk to take independently of whether you pay down the mortgage.

Are you deducting the interest? If so, you have a tax-free return of, say, 2.85% in a 24% tax bracket for paying down the mortgage. At that rate, it would be worth paying the whole mortgage off at once, because that has a 6-year duration, and munis with a 6-year duration yield less than 2.85%. However, it wouldn't be worth making a small extra payment, because that has a 12-year duration.

If you cannot deduct the interest, then you get a tax-free return of 3.75% for paying it down. That is worth paying down even on the 12-year duration, as long as you don't need the liquidity.
Wiki David Grabiner

Nissanzx1
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Re: Pay extra on mortage if I'm already maxing 401k and Roth?

Post by Nissanzx1 » Fri Sep 28, 2018 11:50 pm

Yep go ahead and start into the mortgage with everything extra you can wring out. It's a game changer for sure.

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bligh
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Re: Pay extra on mortage if I'm already maxing 401k and Roth?

Post by bligh » Sat Sep 29, 2018 12:59 am

I would pay down the mortgage if I were in your shoes. Why? Because if I owned my house outright, I would not have borrowed the money to invest into my taxable account.

Having said that, investing the money in a taxable account while staying leveraged on your home will most likely have a superior financial outcome.

novemberrain
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Re: Pay extra on mortage if I'm already maxing 401k and Roth?

Post by novemberrain » Sat Sep 29, 2018 1:17 am

I had asked a very similar question a few months back.
viewtopic.php?f=1&t=249242

onourway
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Re: Pay extra on mortage if I'm already maxing 401k and Roth?

Post by onourway » Sat Sep 29, 2018 6:02 am

As you can see this is a highly personal decision and there is no ‘best’ answer.

In our case I stopped paying extra on the mortgage because we’re 5 years into a 15-year term, the interest rate is very low, the payment and total balance are very low relative to our income, and I’m trying to bolster our taxable account. For where we are in our lives at this point, having the liquidity of a large taxable account will give us more options than paying off the mortgage a few years early.

chevca
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Re: Pay extra on mortage if I'm already maxing 401k and Roth?

Post by chevca » Sat Sep 29, 2018 8:30 am

Personally, I would pay down the mortgage before taxable investing in the OP's case. But, that's just me.

OP, what would make you feel more comfortable, paying down the mortgage or further investing?

mortfree
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Re: Pay extra on mortage if I'm already maxing 401k and Roth?

Post by mortfree » Sat Sep 29, 2018 8:51 am

How much “extra “ do you have?

I was going to tell you to split the extra - 50% to invest and 50% to mortgage.

I put an extra $260-300/month towards my mortgage but I wouldn’t split that small amount.

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Earl Lemongrab
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Re: Pay extra on mortage if I'm already maxing 401k and Roth?

Post by Earl Lemongrab » Sat Sep 29, 2018 1:44 pm

I would open a taxable account and continue investing.
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nolesrule
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Re: Pay extra on mortage if I'm already maxing 401k and Roth?

Post by nolesrule » Sat Sep 29, 2018 1:54 pm

Earl Lemongrab wrote:
Sat Sep 29, 2018 1:44 pm
I would open a taxable account and continue investing.
This is what I do.

I also recommend that if someone feels like doing something about the mortgage payment, just round up the payment to the nearest $10, $25 or $50 to scratch the mortgage paydown itch.

bradpevans
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Re: Pay extra on mortage if I'm already maxing 401k and Roth?

Post by bradpevans » Sat Sep 29, 2018 8:03 pm

nolesrule wrote:
Sat Sep 29, 2018 1:54 pm
Earl Lemongrab wrote:
Sat Sep 29, 2018 1:44 pm
I would open a taxable account and continue investing.
This is what I do.

I also recommend that if someone feels like doing something about the mortgage payment, just round up the payment to the nearest $10, $25 or $50 to scratch the mortgage paydown itch.
This IS exactly what I do. 25.05 extra principal every month

spitty
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Re: Pay extra on mortage if I'm already maxing 401k and Roth?

Post by spitty » Sun Sep 30, 2018 7:52 am

Depends how disciplined you are with that money not used to prepay. Will you spend more of it here and there on "stuff" rather than invest it? I didn't trust myself so stayed on a strict pre-payment plan until done; and I'd do the same again even with a rate less than 4%. It's a great feeling that first month you don't have a mortgage payment!
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