ricksample
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Hi Everyone!
I know this is a hot topic and others have posted it as well. However, my circumstances are a little different. Why? Two reasons: We are in our 20's and built our house to serve as our home, not an investment & we don't get any tax breaks on the interest we pay on our mortgage because our payments are so low and we don't pay to much in interest, well not enough to itemize our deductions.
1.5 Years ago we paid cash for our land valued at $50,000 and took a loan out for $154,000 to build @ 30 year 5.675%. Then two months ago we refinanced to a 15 year @ 4.375%. Currently our loan is set at $129,000 because we've been adding towards principle every month. So in a 1 1/2 years we were able to knock $25,000 off our loan.
About 6 months ago my wife and I both opened our 401K accounts through our employers. She is adding 6% and I am adding 7%. Last month we opened a Roth IRA account through T. Rowe Price and have that setup so we add $100/month to the account.
Since we are currently adding over $500/month to our retirement accounts, in our budget that only leaves us $60 extra/ month to pay towards the mortgage. Before we were putting $560/month towards the mortgages principle. So right now we are putting a lot more towards our retirement than towards our mortgage. Our mortgage should still be paid off in 10 years by the time I am 35. After our mortgage is paid off, we are going to take a portion of what we were paying to our mortgage (Around $500/month) and put that towards retirement because we want to retire by the time we are 55-60.
My Question, Our tax refund is $2,000. I want to put so much towards our IRA Account and so much towards the house, but I'm a little confused on what to do. I'm totally against putting it all towards one and none towards the other. I know it isn't much, but it's something. What do you guys think I should do with my tax refund every tax season?
Thanks!
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Sun Feb 07, 2010 3:44 pm |
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oldguy
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quote:
Since we are currently adding over $500/month to our retirement accounts, in our budget that only leaves us $60 extra/ month to pay towards the mortgage. Before we were putting $560/month towards the mortgages principle. So right now we are putting a lot more towards our retirement than towards our mortgage. Our mortgage should still be paid off in 10 years by the time I am 35.
IMO you are coming around to the right conclusion - your investment accounts are FAR more important to your family's distant future than the equity in your house.
The $500/m that you are investing, if you invest at 11%, will be about $2,300,000 at age 60 - it will probably be the big part of your wealth. And by then the house will be paid-off no matter which you pay first. A more aggressive plan would be to stop prepaying the house and direct $1000/m to the investing and earn $4.6M.
Mathematically, you can never catch up by investing later. The power of compounding depends on 'time', lots of time. So if you derail your investing in order to prepay the house, the idea that you can catch it up later is futile. That doesn't make you wrong - if your goal is a paid-for house at the expense of future wealth, that is an acceptable choice, many families are more comfortable with a paid-for home.
In my case, over the past 35 yrs, I refinanced and removed equity from our rental houses often, and invested the equity. Eg, take $50,000 out of a house, invest at 11% for 30 yrs and grow it to $1.2M. If you do that a few times, your Net Worth stacks up quite a bit faster than the value of the houses - altho the houses also did well over 30 yrs.
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Sun Feb 07, 2010 6:49 pm |
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ricksample
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quote:
Originally posted by oldguy
quote:
Since we are currently adding over $500/month to our retirement accounts, in our budget that only leaves us $60 extra/ month to pay towards the mortgage. Before we were putting $560/month towards the mortgages principle. So right now we are putting a lot more towards our retirement than towards our mortgage. Our mortgage should still be paid off in 10 years by the time I am 35.
IMO you are coming around to the right conclusion - your investment accounts are FAR more important to your family's distant future than the equity in your house.
The $500/m that you are investing, if you invest at 11%, will be about $2,300,000 at age 60 - it will probably be the big part of your wealth. And by then the house will be paid-off no matter which you pay first. A more aggressive plan would be to stop prepaying the house and direct $1000/m to the investing and earn $4.6M.
Mathematically, you can never catch up by investing later. The power of compounding depends on 'time', lots of time. So if you derail your investing in order to prepay the house, the idea that you can catch it up later is futile. That doesn't make you wrong - if your goal is a paid-for house at the expense of future wealth, that is an acceptable choice, many families are more comfortable with a paid-for home.
In my case, over the past 35 yrs, I refinanced and removed equity from our rental houses often, and invested the equity. Eg, take $50,000 out of a house, invest at 11% for 30 yrs and grow it to $1.2M. If you do that a few times, your Net Worth stacks up quite a bit faster than the value of the houses - altho the houses also did well over 30 yrs.
Thanks! That really makes sense. Originally I was going to wait to start my retirement account until I got the house paid off. That's when I realized about the power of compounding. My wife and I first started saving a small percentage into our companies 401K plans. In the past few months we've increased it so she is at 6% and I am at 7%. Then we decided to save even more, so last month we opened a Roth IRA with $100/month going into the account.
Now my apatite for saving for retirement has increased even more which is why I want to put a portion of my income tax each year towards retirement. Originally I was just going to put it all towards the house. But when the house is paid off, that money is gone.
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Sun Feb 07, 2010 9:20 pm |
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jennquilter
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quote:
...if you invest at 11%, will be about...
11% rate over all that time seems a little high to me, oldguy
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Sat Feb 13, 2010 11:44 pm |
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oldguy
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quote:
11% rate over all that time seems a little high to me, oldguy
I like to invest at the 11%/yr to 12%/yr level - it requires that you put 80% to 85% in stock funds and only 10% or 15% in bonds. But, you are correct, some people like a lower risk and a lower return, maybe 8%/yr.
But remember, you must chop your risk level way down when you enter your wealth preservation years at about age 55 or 60. That leaves each of us with about a 30-yr time block to build our family wealth. And just to put a number on it - a $100,000 account @ 12%/yr = $3,000,000. At 8% it is only $1,000,000. The compounding equation is very powerful. 
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Sun Feb 14, 2010 1:36 am |
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Paul22
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If you’re looking to remortgage, having a smaller mortgage can mean you get a better deal. Therefore if you’ve got savings, and can use it to significantly lower your mortgage borrowing, which gets you a cheaper rate, it can be worth doing even ahead of paying off more expensive debts.
That’s because getting your massive mortgage debt a little cheaper can outweigh paying a higher interest rate on a smaller debt.
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Wed Feb 24, 2010 1:13 pm |
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Creditnet_com
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If you're receiving a tax refund of $2,000 each year, another option to consider is updating your payroll to deduct less Federal income tax each pay period. You're essentially giving the government a $2,000 loan and receiving no return on it. That could potentially be around $166 more per month to put in retirement ($2,000 / 12 months).
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Thu Feb 25, 2010 1:31 am |
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FrankHertz
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If you are in fact getting a remortgage then refinancing and getting a smaller mortgage could be a better option. Especially if your interest rates were years back then you would likely be paying much less by having a lower interest rate now then you did back then.
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Tue Jun 14, 2011 7:07 pm |
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littleroc02us
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You need to account for risk when you invest because it's not always peaches and cream. In fact getting an 11% return like Old guy stated isn't a gaurentee, so I would look more at what is more important to you, the possibility that you get a good return on your money if you invest wisely or it doesn't do well and you only get 5% return on your investments and leave it alone for 30 years and have lost tons of interest on payments or a paid off house and a couple million for retirement.
“If you want to stay in debt forever, keep borrowing money.”
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Tue Jun 14, 2011 8:10 pm |
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Richardus
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One other consideration is interest rate risk – if you have a mortgage that is variable or only locked in for a few years then at the end of the term you will have to renew at the current interest rate (at that time) which might be a lot higher than it is now. Reducing your mortgage helps mitigate this risk.
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Mon Jun 20, 2011 12:37 pm |
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keshavmish
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personally have not made a mortgage payment in two years. Am I proud of this? No.
Not at all.
If you are facing foreclosure you are likely familiar with that "sick to your stomach", heart-racing, can't sleep feeling of persistent anxiety.
That's what I've lived with for the past two years.
I still remember the night in September of 2008 when we decided to stop paying. This was not a spur of the moment decision. We agonized over our choices for weeks, but ultimately came to realize this was our only hope of saving our home.
I mean, our OWN mortgage servicer informed me that we would not get any attention for a modification as long as our payments were current. Apparently, being proactive is not a desirable quality in borrower. Go figure.
If you research on the internet as I did, you'll find many opinions as to whether or not you should stop paying and plenty of holier than thou attitudes condemning those that choose this option as a strategy to modify their loan.
My advice? Don't listen to the negativity. Nobody is perfect and for those people out there that have never made a mistake and live perfect little lives, well....kudos to them. For the rest of us imperfect people, we still need a roof over our heads and this is the route we chose to take.
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Sat Aug 20, 2011 1:14 pm |
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davidcosell
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Paying off your mortgage early is one of the best investments you can make.
You get rid of your biggest debt fast, you are no longer at the mercy of the see-saw property market and you can put the money you are no longer paying on the mortgage to good work.
Borrowing heavily makes sense in a world of high inflation, which we saw in the Seventies and Eighties, because inflation reduces the value of the debt.
But in a world of low inflation the debt stays pretty much as it is.
Inflation may have risen in recent years but it is currently relatively low historically speaking, especially using the Government's preferred Consumer Prices Index measure. Crucially, however, just having inflation is not the key to eroding your debt, you also need wage inflation. This has been virtually non-existent since the recession hit and if you can't rely on large wage increases reducing your debt then paying it off asap is a wise move.
Read more: http://www.thisismoney.co.uk/money/mortgageshome/article-1585690/A-guide-to-pay-mortgage-early.html#ixzz1WXC63c00
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Tue Aug 30, 2011 5:20 pm |
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