Retirement Saving vs Foreign Loan Pay-off

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Retirement Saving vs Foreign Loan Pay-off

Post by greenman1 » Fri Jan 11, 2019 5:06 pm

Hello Everyone,

I have been reading these forums for a couple of months now and this is my first post.

Age: 50 (Husband), 47 (Wife)
Gross Income: 153K
Retirement Savings: 530K (pre-tax), 190K (Roth IRA)
Emergency Fund: 60K
Mortgage: 400K balance, 30years @3.625%, PITI payment about 2950 per month, 29 years left. I pay only regular monthly payments, nothing extra.
Home market value 420K (I am paying PMI of 140 a month)

We bought a second home in India last year, in which we owe an Indian Mortgage, about 75K USD @8.5% for 10 years - 9.5 years left. This is vacation/may be eventual retirement home, NOT rented out. The house is worth around 140K USD.

After reading several posts here, I am thinking that we may have bought more home than we can afford, trying to determine how best to proceed.

My question is about the mortgage payment on the Indian property vs retirement contributions. I am considering a few options:

Option 1: Contribute up-to the company match to 401K (6%) and put all available extra money to the Indian Mortgage, considering the interest rate is high compared to US rates.

Option 2: Pay regular payments to Indian mortgage. If Indian currency depreciates (which it has done historically), I will be paying less in USD in future years, so contribute more to 401K to take advantage of tax deduction (22% federal, 0% state)

Option 3: Pay off 50K (out of 75) by taking a 401K loan (max 50K loan allowed). The Indian bank allows recasting the loan so the monthly payment will go down, since I will only owe about 25K. 401K loan is available @6.5% for 5 years, this will replace the a portion of the bond allocation (which is 35%) and the interest will go to my 401K account instead of to the bank. I will be able to contribute at least up-to the company match, in addition to the loan repayment.

Option 4: Take 75K out of Roth IRA (contributions only, so no taxes/penalty) and pay off the Indian Mortgage completely now. This will eliminate the monthly payment, allowing me to contribute more to 401K and get tax deduction.

Thanks for your thoughts/comments on these options. Any other ideas also appreciated.

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Re: Retirement Saving vs Foreign Loan Pay-off

Post by grabiner » Sat Jan 12, 2019 12:11 pm

The way to evaluate the Indian mortgage is to compare dollar and rupee rates, and adjust accordingly. If an Indian bank offers a rupee rate of 7% on a five-year CD (or the Indian equivalent), and a dollar rate of 3%, that implies that the rupee is expected to depreciate by 4% against the dollar, and a rupee payment against a 9.5% mortgage would have a 5.5% dollar return.

What are the terms for getting rid of PMI on the US mortgage? If you can do that by making extra payments, then paying down the US mortgage is likely to be a better deal. If you can't get rid of PMI until the mortgage is scheduled to reach 80% LTV, then you are probably stuck with it; your mortgage rate is lower than the market rate, and thus refinancing to eliminate PMI isn't a good deal.
Wiki David Grabiner

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