| Early Mortgage Payoff vs. Saving |
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mopowers
Member
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Location: CA
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| Early Mortgage Payoff vs. Saving |
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I'm getting a $4,700 refund from my taxes this year and need to figure out what to do with it.
I just bought my first home in 2009, so I have about 28 years left on a 30 year $300,000 mortgage (still owe about $294k).
I'm thinking about using my refund to pay down my home loan principal. I've also thought about using it to build my emergency savings or a savings I have set aside for future home repairs.
Any ideas?
Lastly, I'm going to adjust my tax withholdings so I don't get refunds this large in the future. Should I use the extra $300-$400 a month for retirement savings, home loan principal 'pay-down,' or split it amongst the two?
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Fri Feb 11, 2011 5:57 pm |
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coaster
Senior Advisor
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Location: Wisconsin
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My vote is for savings.
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Fri Feb 11, 2011 6:54 pm |
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oldguy
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quote:
to pay down my home loan principal. I've also thought about using it to build my emergency savings or a savings I have set aside for future home repairs.
Unless you have a toxic interest rate, prepaying the mortgage would be my last choice. When you are young, with time on your side, you need to put your extra income stream to it's highest and best use.
Eg, $5000/yr invested at 11%/yr is $890,000 in 28 yrs. So, would you rather have put the 28 * $5000 = $140,000 into a house? Or into a $890,000 investment plan?
Yes, build a $5000 or $10,000 EF. Then, fund a 401k and a taxable fund. Both should be in 10% to 12% products. The 401k fund is your post-59 1/2 fund to build retirement wealth. The taxable fund is your pre-59 1/2 wealth account to use for a fall-back EF, cars, rental houses, early retirement, etc.
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Fri Feb 11, 2011 9:05 pm |
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jollystomper
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I would also vote for the savings. paying the balance down from 294K to 290K really is not going to make that much difference at this stage in your life. And you are getting a benefit since mortgage interest is deductible (and likely a factor in you getting a refund). For now I would focus on building the savings - I'm no financial expert but I would follow the simple process of emergency fund->401K->taxable fund.
I would follow the same process after adjusting your withholding - use it to build up your emergency fund, after that is don perhaps split it between a 401K and taxable fund (not necessarily 50-50).
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Sat Feb 12, 2011 2:57 am |
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RichS
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I agree that the EF, if you don't already have one fully funded, makes more sense than paying down your mortgage. Also I am glad to see that you have realized that that $4700 refund you are going to get was an interest free loan to Uncle Sam that you cannot afford to do any longer. Good for you.
With all of the uncertainty in the employment market today everyone needs to have an emergency fund of 6 to 9 months living expenses. It used to be 3 months but that doesn't fit with today's employment picture. 
Rich CFP(r)
Writer/Publisher/Speaker
Author "Your In Simple Language Guide to Basic Investments"
www.insimplelanguage.com
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Mon Feb 14, 2011 8:44 pm |
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marketeye
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Although prepaying off the mortgage seems like a good decision, investing is a financially realistic option for many people. This gives you some safety net against financial emergencies or losses. Besides a $4,700 deduction won't really make a significant impact on the loan.
http://securemortgages.co.za
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Mon Feb 14, 2011 9:32 pm |
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GotCommonCents
Contributing Member
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Location: North Carolina
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My advice would be to first establish an emergency fund of 3-6 months of expenses.
Then, make sure you are investing 15% of your income for retirement.
With whatever is left, pay off the mortgage as fast as possible.
For more advice about how to handle your personal finances and manage your life in a way that will be prosperous, check out my blog:
www.GotCommonCents.com
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Fri Apr 01, 2011 10:00 pm |
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AtoZ
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Take some risk with the extra - provided you already have an emergency fund in place. Invest it and watch it grow for retirement or other plans.
ITIN Number
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Mon Apr 11, 2011 7:35 pm |
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