Payoff Mortgage in 2 years or max out 401k

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aaronbabu
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Payoff Mortgage in 2 years or max out 401k

Post by aaronbabu »

Hello all,

My wife and I are 31 and we both have been maxing out 401k, backdoor roth. Recently brought a home and outstanding principal is ~301k (30yr, 3.625%). I have been looking into options to pay off the mortgage as soon as possible.
I have $35k saved in emergency account and set aside for 6 months expense.
I have $150 saved so far.
I also have a side business that brings $30k yearly.
If we stopped contributing to 401k, that is an additional $39k yearly
So, theoretically I should be able to pay off the mortgage in 2 years.
Is this a good strategy where i won't be contributing to 401k for two years but could save tons in interest. After all, i'm not really saving anything until i have paid off my debt.

Kindly let me know if I'm thinking properly.

Thanks,
Aaron
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willthrill81
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Re: Payoff Mortgage in 2 years or max out 401k

Post by willthrill81 »

What is your current tax bracket?

If you kept contributing to your 401k, what would you be buying (e.g. stocks, bonds, AA)?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
WarAdmiral
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Re: Payoff Mortgage in 2 years or max out 401k

Post by WarAdmiral »

I would say max out 401k due to it's tax advantage. After that, the rest can go into paying off mortgage. There is a certain peace of mind (and a sense of accomplishment) that comes with paying off your mortgage plus you get "extra" cash to invest every month.
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aaronbabu
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Re: Payoff Mortgage in 2 years or max out 401k

Post by aaronbabu »

willthrill81 wrote: Tue May 05, 2020 1:42 pm What is your current tax bracket?

If you kept contributing to your 401k, what would you be buying (e.g. stocks, bonds, AA)?
Filing jointly at 24% tax bracket. Asset allocation is split 70% stocks and 30% bonds.
tashnewbie
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Re: Payoff Mortgage in 2 years or max out 401k

Post by tashnewbie »

aaronbabu wrote: Tue May 05, 2020 1:40 pm I have $150 saved so far.
Is that $150 or $150K?
Topic Author
aaronbabu
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Re: Payoff Mortgage in 2 years or max out 401k

Post by aaronbabu »

tashnewbie wrote: Tue May 05, 2020 2:15 pm
aaronbabu wrote: Tue May 05, 2020 1:40 pm I have $150 saved so far.
Is that $150 or $150K?
My bad lol, its $150k.
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Ben Mathew
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Re: Payoff Mortgage in 2 years or max out 401k

Post by Ben Mathew »

I would suggest that you prioritize the 401K and backdoor Roth over prepayment of the mortgage. Since you are maxing out your tax advantaged space, any dollars you don't put in this year cannot go back in future years. So it's important to continue maxing out every year. You are probably underexposed to stock now relative to your expected stock expsoure closer to retirement. So higher stock exposure now is better value than an early prepayment of the mortgage.

However, refinancing to a lower interest 15 year mortgage can still be a good idea though. The difference in monthly payment between the 30 year and the 15 year may be pretty small.
hudson
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Re: Payoff Mortgage in 2 years or max out 401k

Post by hudson »

aaronbabu wrote: Tue May 05, 2020 1:40 pm Hello all,

My wife and I are 31 and we both have been maxing out 401k, backdoor roth. Recently brought a home and outstanding principal is ~301k (30yr, 3.625%). I have been looking into options to pay off the mortgage as soon as possible.
I have $35k saved in emergency account and set aside for 6 months expense.
I have $150 saved so far.
I also have a side business that brings $30k yearly.
If we stopped contributing to 401k, that is an additional $39k yearly
So, theoretically I should be able to pay off the mortgage in 2 years.
Is this a good strategy where i won't be contributing to 401k for two years but could save tons in interest. After all, i'm not really saving anything until i have paid off my debt.

Kindly let me know if I'm thinking properly.

Thanks,
Aaron
If the 401K and Social Security are your retirement plan, I would continue to max out the 401K. Use any extra money to pay down the mortgage.
tashnewbie
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Re: Payoff Mortgage in 2 years or max out 401k

Post by tashnewbie »

aaronbabu wrote: Tue May 05, 2020 2:20 pm
My bad lol, its $150k.
What are your plans for the $150K?
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willthrill81
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Re: Payoff Mortgage in 2 years or max out 401k

Post by willthrill81 »

aaronbabu wrote: Tue May 05, 2020 1:52 pm
willthrill81 wrote: Tue May 05, 2020 1:42 pm What is your current tax bracket?

If you kept contributing to your 401k, what would you be buying (e.g. stocks, bonds, AA)?
Filing jointly at 24% tax bracket. Asset allocation is split 70% stocks and 30% bonds.
I'd hate to forego a 24% tax deduction in order to pay down my mortgage, especially since your portfolio still isn't that sizable relative to your income.

I would probably recommend that you continue maxing out your tax-advantaged space and only put additional savings you may have toward your mortgage.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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whodidntante
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Re: Payoff Mortgage in 2 years or max out 401k

Post by whodidntante »

It's too bad you didn't ask before, because I would have suggested sinking the 150k into your down payment, and then opt for a lower cost 10-year or 15-year mortgage. That would have saved you a chunk, and in my opinion, 10 or 15 years is plenty fast to pay off a mortgage. It would have allowed you to max or at least contribute heavily to your tax-advantaged accounts simultaneously.

However, the credit union who carries my mortgage currently offers a 2.5% 15-year note, so at worst you wasted a few grand on closing costs if similar rates are available to you. You'll still save a lot of money over the life of the loan.

Foregoing the pre-tax and Roth contributions will have a high tax cost, particularly if you intend to live out your life in the USA. In addition, you'd likely miss out on years of equity returns.
Wolfpack2463
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Re: Payoff Mortgage in 2 years or max out 401k

Post by Wolfpack2463 »

Ben Mathew wrote: Tue May 05, 2020 2:21 pm I would suggest that you prioritize the 401K and backdoor Roth over prepayment of the mortgage. Since you are maxing out your tax advantaged space, any dollars you don't put in this year cannot go back in future years. So it's important to continue maxing out every year. You are probably underexposed to stock now relative to your expected stock expsoure closer to retirement. So higher stock exposure now is better value than an early prepayment of the mortgage.

However, refinancing to a lower interest 15 year mortgage can still be a good idea though. The difference in monthly payment between the 30 year and the 15 year may be pretty small.
If you don't use it, you lose it.

Continue to max out 401k.
gclancer
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Re: Payoff Mortgage in 2 years or max out 401k

Post by gclancer »

I would prioritize filling any tax advantaged buckets available to you each year before you prepay your mortgage. A middle ground would be refinancing into a 15 year mortgage now that rates have dropped.
zeal
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Re: Payoff Mortgage in 2 years or max out 401k

Post by zeal »

Same answer as everyone else... 401k & backdoor Roth would be my first priority, then mortgage. Possibly even a taxable investment account before extra payments on the mortgage. A 3.625% interest rate is not bad at all, especially if you believe your investments will perform at a better rate. Opportunity cost!

My wife and I are both right around 31 and at the beginning of our mortgage too (3.875%, 29 years left) and we are choosing to prioritize investments right now. At some point we will have enough saved that we can pay the mortgage off in a lump sum if we choose. By investing this money now, we expect that point in time to come sooner than if we were to send it straight to the mortgage.
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willthrill81
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Re: Payoff Mortgage in 2 years or max out 401k

Post by willthrill81 »

zeal wrote: Tue May 05, 2020 2:51 pm Same answer as everyone else... 401k & backdoor Roth would be my first priority, then mortgage. Possibly even a taxable investment account before extra payments on the mortgage. A 3.625% interest rate is not bad at all, especially if you believe your investments will perform at a better rate.
Investing in a 401k in order to take advantage of the tax benefits is one thing, but I definitely would not recommend that anyone buy bonds at today's rates in a taxable account when they have a 3.625% mortgage and probably can't write off any of the interest. A guaranteed 3.625% return is pretty much unbeatable these days. That's about double what a total bond market fund is likely to return pre-tax over the next decade.

After tax-advantaged accounts are filled, I would prioritize paying off the mortgage either directly or indirectly, assuming that the OP has enough liquidity. The 'indirect' approach would be to stash the additional funds in something like a high yield savings account until they accumulate enough to pay off the mortgage at one time, which preserves liquidity as long as possible.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
zxllxz
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Re: Payoff Mortgage in 2 years or max out 401k

Post by zxllxz »

Consider paying additional principal each mouth. It looks like with your numbers you would be paying $195k in interest over the life of the mortgage, paying it off in 2050. If you add $500 a month in principal, you will only pay $112k in interest and the mortgage will be paid off in 2038. You may want to play with a mortgage amortization calculator to see what portion of your payment is in principal and interest every month, and what addition principal payment each month will do to your overall mortgage cost. I would not recommend shorting your retirement accounts at your age. Time is on your side.
zeal
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Re: Payoff Mortgage in 2 years or max out 401k

Post by zeal »

willthrill81 wrote: Tue May 05, 2020 2:54 pm
zeal wrote: Tue May 05, 2020 2:51 pm Same answer as everyone else... 401k & backdoor Roth would be my first priority, then mortgage. Possibly even a taxable investment account before extra payments on the mortgage. A 3.625% interest rate is not bad at all, especially if you believe your investments will perform at a better rate.
Investing in a 401k in order to take advantage of the tax benefits is one thing, but I definitely would not recommend that anyone buy bonds at today's rates in a taxable account when they have a 3.625% mortgage and probably can't write off any of the interest. A guaranteed 3.625% return is pretty much unbeatable these days. That's about double what a total bond market fund is likely to return pre-tax over the next decade.

After tax-advantaged accounts are filled, I would prioritize paying off the mortgage either directly or indirectly, assuming that the OP has enough liquidity. The 'indirect' approach would be to stash the additional funds in something like a high yield savings account until they accumulate enough to pay off the mortgage at one time, which preserves liquidity as long as possible.
Good point. I just assumed he'd be buying stocks (which may or may not perform better than 3.625% for OP's time period), not bonds. I don't use a taxable account much, so things like tax efficiency didn't cross my mind.
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Watty
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Re: Payoff Mortgage in 2 years or max out 401k

Post by Watty »

aaronbabu wrote: Tue May 05, 2020 1:52 pm Kindly let me know if I'm thinking properly.
....

Filing jointly at 24% tax bracket.
Do you also have state taxes?

One thing you may be missing is that for every $10,000 you put into a deductible 401k then in the 24% stax bracket you would also have $2,400 in tax savings.

You could use that $2,400 to pay down your mortgage.

I am usually in the front row of the "pay off the mortgage" cheerleading camp but even to me maxing out the 401k looks like a better choice since you are in the 24% tax bracket.

aaronbabu wrote: Tue May 05, 2020 1:40 pm After all, i'm not really saving anything until i have paid off my debt.
That is not true. Adjusted for taxes your net worth goes up the same amount if you put a dollar into paying down the principal of your mortgage or if you put it in a 401k.

One thing I have done for years is to update a very simple spreadsheet with my net worth each year on January 1st so I can see my progress from year to year. You might start doing that if you are not doing that already.
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Nate79
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Re: Payoff Mortgage in 2 years or max out 401k

Post by Nate79 »

Keep maxing your retirement accounts and pay off the mortgage in 3 years.
Kruser64
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Re: Payoff Mortgage in 2 years or max out 401k

Post by Kruser64 »

There is at least one other choice...invest in after tax brokerage. Tax deferred is great...until you run into rules like RMDs, ACA cliffs, IRMAA, plan annoyances, and a whole host of other downsides that don't get discussed much. Just another variable to think about. :happy

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willthrill81
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Re: Payoff Mortgage in 2 years or max out 401k

Post by willthrill81 »

Kruser64 wrote: Tue May 05, 2020 5:41 pm There is at least one other choice...invest in after tax brokerage. Tax deferred is great...until you run into rules like RMDs, ACA cliffs, IRMAA, plan annoyances, and a whole host of other downsides that don't get discussed much. Just another variable to think about. :happy

-Kruser64
Tax-advantaged nearly always beats taxable in terms of creating after-tax wealth, even with those annoyances, many of which are never encountered or really problematic by many participants.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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gr7070
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Re: Payoff Mortgage in 2 years or max out 401k

Post by gr7070 »

I'm a big fan of paying off the mortgage early. I think the guaranteed return is highly undervalued!

However, I would not forgo at least saving what's needed for retirement to pay extra on the mortgage. At the minimum one should fully fund whatever their savings plan calls for, e.g 15% gross.

Additionally, it's likely best to max out 401k savings, and probably Roth IRAs, as well, before paying down the mortgage.

Any taxable savings is perfectly reasonable to be put into the mortgage.
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gr7070
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Re: Payoff Mortgage in 2 years or max out 401k

Post by gr7070 »

Watty wrote: Tue May 05, 2020 3:34 pm I am usually in the front row of the "pay off the mortgage" cheerleading camp but even to me maxing out the 401k looks like a better choice since you are in the 24% tax bracket.
I'm probably three seats down from you. And agree that maxing a 401k is almost certainly optimal mathematically.
LittleMaggieMae
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Re: Payoff Mortgage in 2 years or max out 401k

Post by LittleMaggieMae »

I don't see why the OP bothered to get a mortgage... they could have just paid cash (maybe started a few years earlier redirecting their 401K contributions etc.) and not bothered with the expense/hassle of taking a mortgage. I'm being a little sarcastic - but not. I would think the answer to the why they took a mortgage in the first place (when clearly they didn't need to) would answer if they should pay off the mortgage in 2 years (rather than some longer term).

I assume you spent time and effort and emotion going over your numbers, thinking/planning how the mortgage payment effected your future spending/budgeting, maybe choosing NOT to do some descretionary expenses now or in the near future, etc) as part of the house buying journey. Why would you scrap all of your 2/5/10 year plans (redo all of your future plans) so you can have a paid off house in two years? That seems kind of counter intuitive.

Are you just not sure what to spend your time and emotion on - now that the dust has settled and you've accomplished the goal of "buying a house"? If you need drama in your life why not explore a new hobby?

Needless to say I am not in the pay off the mortgage early no matter what the consequences/expense of it doing it camp.

I think you should keep the mortgage and stick to your long term plan (of which the mortgage payment) was a part of.

(um, you do have long term goals and plans and fit the purchase/upkeep of the house into them, right?)
Kruser64
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Re: Payoff Mortgage in 2 years or max out 401k

Post by Kruser64 »

willthrill81 wrote: Tue May 05, 2020 5:43 pm
Kruser64 wrote: Tue May 05, 2020 5:41 pm There is at least one other choice...invest in after tax brokerage. Tax deferred is great...until you run into rules like RMDs, ACA cliffs, IRMAA, plan annoyances, and a whole host of other downsides that don't get discussed much. Just another variable to think about. :happy

-Kruser64
Tax-advantaged nearly always beats taxable in terms of creating after-tax wealth, even with those annoyances, many of which are never encountered or really problematic by many participants.
yes, "nearly always". :happy The widow penalty on deferred can be brutal, the step up in basis for heirs on a brokerage can be huge, no more stretch for heirs...scheesh there are variables - values unknown - that can have absolutely massive impact.

-Kruser64
medic
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Re: Payoff Mortgage in 2 years or max out 401k

Post by medic »

can you take the 150K (or a portion of it) and recast your mortgage? reamoritize loan across the remaining life with a lower payment. if you keep your payment the same though, you essentially accelerate the paydown.

recasting is generally much less expensive than refinancing.
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willthrill81
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Re: Payoff Mortgage in 2 years or max out 401k

Post by willthrill81 »

Kruser64 wrote: Tue May 05, 2020 6:48 pm
willthrill81 wrote: Tue May 05, 2020 5:43 pm
Kruser64 wrote: Tue May 05, 2020 5:41 pm There is at least one other choice...invest in after tax brokerage. Tax deferred is great...until you run into rules like RMDs, ACA cliffs, IRMAA, plan annoyances, and a whole host of other downsides that don't get discussed much. Just another variable to think about. :happy

-Kruser64
Tax-advantaged nearly always beats taxable in terms of creating after-tax wealth, even with those annoyances, many of which are never encountered or really problematic by many participants.
yes, "nearly always". :happy The widow penalty on deferred can be brutal, the step up in basis for heirs on a brokerage can be huge, no more stretch for heirs...scheesh there are variables - values unknown - that can have absolutely massive impact.

-Kruser64
I have often reminded people of the 'surviving spouse being thrust into a higher tax bracket' problem, but in the OP's case, there's a 0% chance of that happening given his current level of savings. The same goes for RMDs, IRMAA, and ACA cliffs. This is something that the OP will need to reassess in the future as the portfolio grows.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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grabiner
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Re: Payoff Mortgage in 2 years or max out 401k

Post by grabiner »

I would suggest maxing out the 401(k). You will earn a bit less if you put money in a low-risk investment in the 401(k) rather than paying down your mortgage. However, this only lasts until the mortgage is gone, which should happen fairly quiclly anyway. After the mortgage is gone, the money that is in the 401(k) will continue to grow tax-deferred, and you would lose that opportunity.

But since you are paying down the 30-year mortgage aggressively, I suggest refinancing it to 10 or 15 years at a lower rate. You will still pay it off on about the same schedule, but pay less interest along the way.
gr7070 wrote: Tue May 05, 2020 6:02 pm However, I would not forgo at least saving what's needed for retirement to pay extra on the mortgage. At the minimum one should fully fund whatever their savings plan calls for, e.g 15% gross.
Extra mortgage payments also work as retirement savings; you get the money back with interest when you no longer have to pay the mortgage, and you can invest the money at that time.
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Re: Payoff Mortgage in 2 years or max out 401k

Post by Nutmeg »

medic wrote: Tue May 05, 2020 7:21 pm can you take the 150K (or a portion of it) and recast your mortgage? reamoritize loan across the remaining life with a lower payment. if you keep your payment the same though, you essentially accelerate the paydown.

recasting is generally much less expensive than refinancing.
Medic makes a good point that I didn’t fully understand (despite being highly educated) until several years ago, when I started paying down my mortgage. Therefore, I will expand a bit on Medic’s point in case it will be helpful to you.

If you make an extra principal payment, then the lender will refigure the amount of interest that you owe based on the resulting outstanding principal amount. If you don’t change your monthly payment amount, a smaller amount of each
monthly mortgage payment will be allocated to interest (because you owe less interest), and therefore, a larger amount than before will be allocated to principal every single month from then on.

You can maximize your retirement accounts, make sure you have a healthy emergency fund (as it appears you do), and then make a lump sum principal payment now without paying the whole thing off. The decision isn’t all or nothing.

My family used bonus money to make large principal payments each year for the past several years, and now more than 95 percent of each monthly payment goes to pay off principal. We decided not to pay off the mortgage entirely in order to preserve flexibility, and we are comfortable with that decision.
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Re: Payoff Mortgage in 2 years or max out 401k

Post by 123 »

If you don't utilize available tax-advantaged retirement account space in any year that opportunity is gone forever.
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Re: Payoff Mortgage in 2 years or max out 401k

Post by Brianmcg321 »

I would keep maxing our your 401k at least until you’re 40.

Then just add $100 a month to your payment every year to keep your savings rate high.
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Re: Payoff Mortgage in 2 years or max out 401k

Post by hudson »

123 wrote: Tue May 05, 2020 10:22 pm If you don't utilize available tax-advantaged retirement account space in any year that opportunity is gone forever.
One could kind of add to that tax-advantaged space with IBONDS, but I'm not doing that anymore. The OP probably already knows that?
The Broz
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Re: Payoff Mortgage in 2 years or max out 401k

Post by The Broz »

Invest 15% of your household gross towards retirement. The rest of the surplus goes at the house. Once the house in paid off, you can max out all of your retirement accounts and put any surplus in taxable investments (e.g. three fund portfolio). With no house payments and racking up savings, you will be able to move into that gorgeous house on Easy St. in no time!
tashnewbie
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Re: Payoff Mortgage in 2 years or max out 401k

Post by tashnewbie »

Nate79 wrote: Tue May 05, 2020 3:40 pm Keep maxing your retirement accounts and pay off the mortgage in 3 years.

+1. It's definitely not an either/or dichotomy. I'd probably at least max out 401(k) and Roth space each year and then throw any extra at the mortgage. With the $150K you're sitting on, plus the amount from your side gig, you could do max annual contributions to retirement accounts and still pay off the mortgage in probably 3-4 years. I'd do that, unless you have plans for the $150K.
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Re: Payoff Mortgage in 2 years or max out 401k

Post by willthrill81 »

tashnewbie wrote: Wed May 06, 2020 10:10 amI'd probably at least max out 401(k) and Roth space each year and then throw any extra at the mortgage. With the $150K you're sitting on, plus the amount from your side gig, you could do max annual contributions to retirement accounts and still pay off the mortgage in probably 3-4 years. I'd do that, unless you have plans for the $150K.
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