Pay down house or put money in 401k/Roth IRA

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new2bogle
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Pay down house or put money in 401k/Roth IRA

Post by new2bogle » Mon Apr 30, 2012 12:19 pm

Currently I put in the max into my 401k (16.5 last year, on track so far for 17k this year). I also max my Roth IRA and my wife's Roth IRA. She does not have an income, so no 401k for her. So that is $27k this year.

Out of our budget we live comfortably and usually put between $500-$1k into savings every month (emergency fund, repairs, etc). This account has been pretty steady around the 6-months of expenses level.

Is it better to put $27k into our retirement, or towards paying down the house? I want to say retirement since this money will have to longest time to grow and compound (looking at ~30 years till retirement).

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Toons
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Re: Pay down house or put money in 401k/Roth IRA

Post by Toons » Mon Apr 30, 2012 12:24 pm

You will get various opinions as to what to do, I vote for paying down mortgage with some of your available funds(been there, done that,paid off mortgage :happy )
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

rr2
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Re: Pay down house or put money in 401k/Roth IRA

Post by rr2 » Mon Apr 30, 2012 12:37 pm

I would vote for retirement as it is a use it or lose it space on a yearly basis. We max all retirement space instead of paying any extra on mortgage.

Grt2bOutdoors
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Re: Pay down house or put money in 401k/Roth IRA

Post by Grt2bOutdoors » Mon Apr 30, 2012 12:46 pm

Do not sacrifice the retirement account for the house. The benefit of a long duration fixed rate mortgage is you know what the cost is every month, as your income grows you could direct more $$ into the mortgage to accelerate repayment, but there is no legal requirement that you do so.

Of course, if it comes between having a place to live vs. the retirement account, then by all means secure shelter first. The same goes for food and air - without either you will not live, but you could live if you reduce or stop retirement savings for a brief period of time. Balance is key in everything.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

DSInvestor
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Re: Pay down house or put money in 401k/Roth IRA

Post by DSInvestor » Mon Apr 30, 2012 1:01 pm

I set up my budget to max out all retirement plans. Once I know I can do that, I then decide how much to invest in taxable and how much I send to the mortgage.

Once you get your emergency fund to a level that you're comfortable with (say 6-12 months of expenses), you will have the flexibility to direct some of that 500-1K/month towards your mortgage while continuing to max out your retirement plans. If something happens and you have to spend your emergency fund, you can cut back on the extra mortgage payments to rebuild the emergency fund.
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Tom_T
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Re: Pay down house or put money in 401k/Roth IRA

Post by Tom_T » Mon Apr 30, 2012 1:29 pm

If you have 30 years until retirement, I'd worry more about saving money than paying down the house. Assuming you don't refinance into a brand-new 30-year loan down the road, your mortgage will be paid off by the time you retire, so you won't have to worry about the cash flow once you stop working. (Many people cannot afford to carry a mortgage in retirement; freeing up that cash flow can make all the difference.)

It sounds like you've got plenty of extra money to save, so why not just put a bit extra towards the mortgage? Even another $100/month will shave some time and interest off the loan, and you won't even miss it. This doesn't have to be an either-or question. We get a lot of questions here along the lines of "should I do A or B", and I've personally struggled with such questions... until I realized that, sometimes, the answer is "do a little of both."

new2bogle
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Re: Pay down house or put money in 401k/Roth IRA

Post by new2bogle » Mon Apr 30, 2012 2:02 pm

Looks like the consensus is coming to retirement first, extra to mortgage. I'll work on the second part... Thanks!

rr2
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Re: Pay down house or put money in 401k/Roth IRA

Post by rr2 » Mon Apr 30, 2012 2:02 pm

You are getting some great advice.
GRT2BOUTDOORS wrote:Balance is key in everything.
Tom_T wrote:We get a lot of questions here along the lines of "should I do A or B", and I've personally struggled with such questions... until I realized that, sometimes, the answer is "do a little of both."
As others have said, put 1-200$ of the excess that you have now towards the mortgage. The next time you get a raise, put a significant fraction of it into paying off the mortgage as well. Your house will be paid off in no time.

Out of curiosity what is the mortgage interest rate. Refinance if it is too high.

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Watty
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Re: Pay down house or put money in 401k/Roth IRA

Post by Watty » Mon Apr 30, 2012 4:55 pm

It really depends on the size of your mortgage. Percentagewise putting an extra $10K a year into paying down a $400K mortgage will not have nearly the same impact as if you had a $100K mortgage.

One option you might look at is to refinance to the lowest rate lowest cost adjustable rate mortgage you can find and then aggressively pay it down if you can get it paid off in a relatively short time.

For example if your current loan is at 4% then something like the PenFed no-cost 5/5 ARM that is at 3.0% might work for you if you could get the mortgage paid off in five to ten years.
https://www.penfed.org/55-Adjustable-Ra ... ome-mainAd

I refinanced with this loan late last year with the plan of getting it paid off within about seven years.

There are also lots of other no-cost refinance loans available so it would be worth looking to see what you could get elsewhere.

Another option would be to save up maybe 25% of your mortage balance and then see if your lender will "recast your mortgage" (Google this) which means that if you pay it down by 25% then they will reduce your required monthly mortgage payment by 25%

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grabiner
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Re: Pay down house or put money in 401k/Roth IRA

Post by grabiner » Mon Apr 30, 2012 7:43 pm

new2bogle wrote:Currently I put in the max into my 401k (16.5 last year, on track so far for 17k this year). I also max my Roth IRA and my wife's Roth IRA. She does not have an income, so no 401k for her. So that is $27k this year.

Out of our budget we live comfortably and usually put between $500-$1k into savings every month (emergency fund, repairs, etc). This account has been pretty steady around the 6-months of expenses level.

Is it better to put $27k into our retirement, or towards paying down the house? I want to say retirement since this money will have to longest time to grow and compound (looking at ~30 years till retirement).
What are the terms of your mortgage (interest rate, years left, amount)? What is your tax bracket, and do you itemize deductions? These are important considerations.

For example, if you have 20 years left on a 4% mortgage, and are in a 30% combined federal and state tax bracket, then paying down your mortgage will give you a benefit in 20 years of a 2.8% return. Getting the money into your tax-deferred account first would be a good deal; current yields on long-term risk-free investments are almost that good, and you'll have the money already in tax-deferred accounts rather than needing to invest in taxable accounts later because you have maxed out your tax-deferred accounts.

In contrast, if you have five years left on the same mortgage, and don't itemize deductions because most of your payment is going to principal, then paying down your mortgage will give you a benefit in 5 years of a 4% return, risk-free.
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