Pay down mortgage or contribute to retirement?

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Quentin__Tarantulino
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Joined: Thu Jan 26, 2023 3:02 pm

Pay down mortgage or contribute to retirement?

Post by Quentin__Tarantulino »

I know that the general advice is to fund your retirement before paying down a mortgage aggressively, but I might be in a bit of a different situation. I’m 38, partner is 32. Combined income is $80k. The mortgage is about $283k and is 4.375% now, but is a 10/1 ARM. We’re one year in, so there is nine years left of fixed rate before it goes adjustable and, I assume, will go up. This was probably a bad decision, but I justified it at the time thinking I could refinance at 7-9 years if the rates were good.

We budget pretty well and get back a tax refund in the range of about $15k each year. A mortgage calculator indicates that if we put $15k extra per year toward the mortgage, it would be paid off at about 12 years, meaning the amount remaining after 10 years would be pretty negligible when the rate can start to rise.

Right now we have about $75k saved in retirement accounts, mostly a traditional IRA. I’m saving 7% to my 401k, my wife saves 3% for the match. We makes about the same wage. Should we be increasing our 401k contributions? Increase the IRA, which is just rolled over funds from previous jobs’ 401k’s? Open a Roth IRA? Or pay the mortgage down? Just don’t want to be stuck with a huge rate increase in 10 years.
skives19
Posts: 27
Joined: Thu Jan 17, 2019 6:44 pm

Re: Pay down mortgage or contribute to retirement?

Post by skives19 »

Is $80k your take home or gross?

Do you have an emergency fund?
lakpr
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Re: Pay down mortgage or contribute to retirement?

Post by lakpr »

Quentin,

Welcome to the forum.

First thing to note here is that the 4.375% interest rate you are paying on the mortgage is an after-tax interest rate. With your $80k income, you are in the 12% tax bracket. Let me assume a 3% state income tax rate, with your $80k income.

So paying down the mortgage is the same as earning 4.375% / (1 - 12% - 3%) = 5.15%.

That's the number to focus on. Do you think you can earn AT LEAST 5.15% if you invest the money either in your 401(k) plan or elsewhere, instead of paying down the mortgage? If not, paydown the mortgage. If you are fairly confident, or willing to take your chances in the stock market to beat that return rate, invest in the stock market. It's really a toss up, and speaks to your risk tolerance, really. Do you grab a guaranteed 5.15% return, or continue to play the casino? Each person has to make their own decision there.

With you being in the 12% tax bracket, it is a toss up whether you invest in a 401(k) plan or taxable account or paydown the mortgage. 401(k) money will be taxed eventually when withdrawn, and I doubt it if you would be able to withdraw it at any tax rate less than 12% in the future. As the law stands now, the 12% tax bracket disappears by the end of 2025. Starting in 2026, except for some "personal exemptions" and other deductions, you would pay a marginal tax rate of 15%.

You might as well pay 12% taxes now and either maximize your respective Roth IRAs (all future growth is tax free), or invest in taxable account.

The one big factor that should influence this: if your employer offers a match for your 401(k) contributions. If they do, contribute as much as needed to grab the maximum employer match. That is literally free money that you would be foolish to not take. If there is a match, prioritize 401(k) contributions first before paying down the mortgage or investing in taxable.
[ Edited to add: looks like you are already taking advantage of the match. So whichever option you choose with the rest of the money after maximizing the match, is unlikely to make much of a difference in the big picture ]
KlangFool
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Re: Pay down mortgage or contribute to retirement?

Post by KlangFool »

Quentin__Tarantulino wrote: Thu Jan 26, 2023 3:27 pm
I’m saving 7% to my 401k, my wife saves 3% for the match.
Quentin__Tarantulino,

1) 401K and IRA are not retirement accounts. They are tax-advantaged accounts. You can take money out tax-free and penalty-free before 59 1/2 years old.

https://www.madfientist.com/how-to-acce ... nds-early/

2) You and your spouse did not max up your 401K.

3) What is your marginal tax rate?

4) Do you pay state income tax?

5) How does it makes any sense for you to pay 10+% Federal and state income taxes in order to save 4.375% mortgage interest? 10+% taxes is bigger than 4.375%.

A) Pay 10K towards mortgage and save 4.375% interest.

B) Contribute 10K to 401K and save 10+% taxes.

Why (A) is better than (B)?

KlangFool
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rob
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Re: Pay down mortgage or contribute to retirement?

Post by rob »

Quentin__Tarantulino wrote: Thu Jan 26, 2023 3:27 pm ....and get back a tax refund in the range of about $15k each year....
Stop doing that! The government can do just fine without your loan... fix your withholding to get to a more reasonable amount. Personally, I always try to have an amount owing to them but enough to avoid the penalty for under withholding... unless I want the $5K extra ibonds in which case I blow up my last quarter pay checks and over withhold.
| Rob | Its a dangerous business going out your front door. - J.R.R.Tolkien
Harmanic
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Re: Pay down mortgage or contribute to retirement?

Post by Harmanic »

Quentin__Tarantulino wrote: Thu Jan 26, 2023 3:27 pm I know that the general advice is to fund your retirement before paying down a mortgage aggressively, but I might be in a bit of a different situation. I’m 38, partner is 32. Combined income is $80k. The mortgage is about $283k and is 4.375% now, but is a 10/1 ARM. We’re one year in, so there is nine years left of fixed rate before it goes adjustable and, I assume, will go up. This was probably a bad decision, but I justified it at the time thinking I could refinance at 7-9 years if the rates were good.

We budget pretty well and get back a tax refund in the range of about $15k each year. A mortgage calculator indicates that if we put $15k extra per year toward the mortgage, it would be paid off at about 12 years, meaning the amount remaining after 10 years would be pretty negligible when the rate can start to rise.

Right now we have about $75k saved in retirement accounts, mostly a traditional IRA. I’m saving 7% to my 401k, my wife saves 3% for the match. We makes about the same wage. Should we be increasing our 401k contributions? Increase the IRA, which is just rolled over funds from previous jobs’ 401k’s? Open a Roth IRA? Or pay the mortgage down? Just don’t want to be stuck with a huge rate increase in 10 years.
A lot can happen in 10 years. One thing for certain, any possible increase will be paid on a much smaller principal balance. So if your rate was 1% below a 30 year fixed and IF rates are higher in 10 years (a big IF), then you will still likely end up ahead.

ARM mortgages can be great in high interest rate environments. We used an ARM for our house and saved over $100,000 in interest and were able to pay off the house 10 years earlier than expected.
The question isn't at what age I want to retire, it's at what income. | - George Foreman
Topic Author
Quentin__Tarantulino
Posts: 7
Joined: Thu Jan 26, 2023 3:02 pm

Re: Pay down mortgage or contribute to retirement?

Post by Quentin__Tarantulino »

Harmanic wrote: Thu Jan 26, 2023 4:22 pm
A lot can happen in 10 years. One thing for certain, any possible increase will be paid on a much smaller principal balance. So if your rate was 1% below a 30 year fixed and IF rates are higher in 10 years (a big IF), then you will still likely end up ahead.

ARM mortgages can be great in high interest rate environments. We used an ARM for our house and saved over $100,000 in interest and were able to pay off the house 10 years earlier than expected.
Yeah, it was like 1.2% lower than the fixed rate offered, so I took the risk, although I’m usually more of a “sure thing” kind of guy. Thanks for that perspective.
Topic Author
Quentin__Tarantulino
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Joined: Thu Jan 26, 2023 3:02 pm

Re: Pay down mortgage or contribute to retirement?

Post by Quentin__Tarantulino »

KlangFool wrote: Thu Jan 26, 2023 4:13 pm
Quentin__Tarantulino wrote: Thu Jan 26, 2023 3:27 pm
I’m saving 7% to my 401k, my wife saves 3% for the match.
Quentin__Tarantulino,

1) 401K and IRA are not retirement accounts. They are tax-advantaged accounts. You can take money out tax-free and penalty-free before 59 1/2 years old.

https://www.madfientist.com/how-to-acce ... nds-early/

2) You and your spouse did not max up your 401K.

3) What is your marginal tax rate?

4) Do you pay state income tax?

5) How does it makes any sense for you to pay 10+% Federal and state income taxes in order to save 4.375% mortgage interest? 10+% taxes is bigger than 4.375%.

A) Pay 10K towards mortgage and save 4.375% interest.

B) Contribute 10K to 401K and save 10+% taxes.

Why (A) is better than (B)?

KlangFool
So if I understand correctly (forgive my ignorance,) I’ll be saving more be reducing my taxable income and contributing to a 401k than I will by saving the interest on the mortgage? And that’s before even considering the potential gains in the 401k?

I don’t think we can afford to actually max both of our 401k, but if I’m hearing you right, your advice would be to pay just the minimum payment on the mortgage and put as much as possible into the 401k? Thank you for spelling it out to someone who’s kind of new to these things, although I should’ve done this reading and research 10-15 years ago.
KlangFool
Posts: 31426
Joined: Sat Oct 11, 2008 12:35 pm

Re: Pay down mortgage or contribute to retirement?

Post by KlangFool »

Quentin__Tarantulino wrote: Thu Jan 26, 2023 6:04 pm
KlangFool wrote: Thu Jan 26, 2023 4:13 pm
Quentin__Tarantulino wrote: Thu Jan 26, 2023 3:27 pm
I’m saving 7% to my 401k, my wife saves 3% for the match.
Quentin__Tarantulino,

1) 401K and IRA are not retirement accounts. They are tax-advantaged accounts. You can take money out tax-free and penalty-free before 59 1/2 years old.

https://www.madfientist.com/how-to-acce ... nds-early/

2) You and your spouse did not max up your 401K.

3) What is your marginal tax rate?

4) Do you pay state income tax?

5) How does it makes any sense for you to pay 10+% Federal and state income taxes in order to save 4.375% mortgage interest? 10+% taxes is bigger than 4.375%.

A) Pay 10K towards mortgage and save 4.375% interest.

B) Contribute 10K to 401K and save 10+% taxes.

Why (A) is better than (B)?

KlangFool
So if I understand correctly (forgive my ignorance,) I’ll be saving more be reducing my taxable income and contributing to a 401k than I will by saving the interest on the mortgage? And that’s before even considering the potential gains in the 401k?

I don’t think we can afford to actually max both of our 401k, but if I’m hearing you right, your advice would be to pay just the minimum payment on the mortgage and put as much as possible into the 401k? Thank you for spelling it out to someone who’s kind of new to these things, although I should’ve done this reading and research 10-15 years ago.
1) Correct!

2) You have 15K in tax refund. You can spend that money and max up your 401K.

KlangFool
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Topic Author
Quentin__Tarantulino
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Joined: Thu Jan 26, 2023 3:02 pm

Re: Pay down mortgage or contribute to retirement?

Post by Quentin__Tarantulino »

KlangFool wrote: Thu Jan 26, 2023 7:24 pm 1) Correct!

2) You have 15K in tax refund. You can spend that money and max up your 401K.

KlangFool
I’m glad I found you fine people. That link is pretty helpful too; I’ve saved it to keep in mind as I start to optimize my finances a bit.
Topic Author
Quentin__Tarantulino
Posts: 7
Joined: Thu Jan 26, 2023 3:02 pm

Re: Pay down mortgage or contribute to retirement?

Post by Quentin__Tarantulino »

rob wrote: Thu Jan 26, 2023 4:21 pm
Quentin__Tarantulino wrote: Thu Jan 26, 2023 3:27 pm ....and get back a tax refund in the range of about $15k each year....
Stop doing that! The government can do just fine without your loan... fix your withholding to get to a more reasonable amount. Personally, I always try to have an amount owing to them but enough to avoid the penalty for under withholding... unless I want the $5K extra ibonds in which case I blow up my last quarter pay checks and over withhold.
I just changed jobs and did put my withholding to a higher level so it will probably be less going forward, but for the 2022 taxes I’m thinking it will be roughly the same. I agree with this but also have thought of it as a sort of forced savings in the past. But realistically, just having some discipline is better, and we’re pretty good with budgeting and not overspending now anyway.
capran
Posts: 1074
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Re: Pay down mortgage or contribute to retirement?

Post by capran »

Quentin__Tarantulino wrote: Thu Jan 26, 2023 3:27 pm I know that the general advice is to fund your retirement before paying down a mortgage aggressively, but I might be in a bit of a different situation. I’m 38, partner is 32. Combined income is $80k. The mortgage is about $283k and is 4.375% now, but is a 10/1 ARM. We’re one year in, so there is nine years left of fixed rate before it goes adjustable and, I assume, will go up. This was probably a bad decision, but I justified it at the time thinking I could refinance at 7-9 years if the rates were good.

We budget pretty well and get back a tax refund in the range of about $15k each year. A mortgage calculator indicates that if we put $15k extra per year toward the mortgage, it would be paid off at about 12 years, meaning the amount remaining after 10 years would be pretty negligible when the rate can start to rise.

Right now we have about $75k saved in retirement accounts, mostly a traditional IRA. I’m saving 7% to my 401k, my wife saves 3% for the match. We makes about the same wage. Should we be increasing our 401k contributions? Increase the IRA, which is just rolled over funds from previous jobs’ 401k’s? Open a Roth IRA? Or pay the mortgage down? Just don’t want to be stuck with a huge rate increase in 10 years.
We did a budget freeze when we were young which enabled us to do both- pay off the mortgage and max out retirement accounts. Of course, back then, our house was 9 1/2% interest. But all along everyone said we should not pay off the mortgage. But we have no regrets doing so. Once that mortgage was gone we literally felt like money was growing on trees! We also felt it was like life insurance. If one of us passed young, the others income could still be more than enough with no house payment.
KlangFool
Posts: 31426
Joined: Sat Oct 11, 2008 12:35 pm

Re: Pay down mortgage or contribute to retirement?

Post by KlangFool »

capran wrote: Thu Jan 26, 2023 9:16 pm
Quentin__Tarantulino wrote: Thu Jan 26, 2023 3:27 pm I know that the general advice is to fund your retirement before paying down a mortgage aggressively, but I might be in a bit of a different situation. I’m 38, partner is 32. Combined income is $80k. The mortgage is about $283k and is 4.375% now, but is a 10/1 ARM. We’re one year in, so there is nine years left of fixed rate before it goes adjustable and, I assume, will go up. This was probably a bad decision, but I justified it at the time thinking I could refinance at 7-9 years if the rates were good.

We budget pretty well and get back a tax refund in the range of about $15k each year. A mortgage calculator indicates that if we put $15k extra per year toward the mortgage, it would be paid off at about 12 years, meaning the amount remaining after 10 years would be pretty negligible when the rate can start to rise.

Right now we have about $75k saved in retirement accounts, mostly a traditional IRA. I’m saving 7% to my 401k, my wife saves 3% for the match. We makes about the same wage. Should we be increasing our 401k contributions? Increase the IRA, which is just rolled over funds from previous jobs’ 401k’s? Open a Roth IRA? Or pay the mortgage down? Just don’t want to be stuck with a huge rate increase in 10 years.
We did a budget freeze when we were young which enabled us to do both- pay off the mortgage and max out retirement accounts. Of course, back then, our house was 9 1/2% interest. But all along everyone said we should not pay off the mortgage. But we have no regrets doing so. Once that mortgage was gone we literally felt like money was growing on trees! We also felt it was like life insurance. If one of us passed young, the others income could still be more than enough with no house payment.
capran,

Would you mind telling us the price of the house versus your gross household income at that time? 2X? 3X? 5X?

KlangFool
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Hyperchicken
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Re: Pay down mortgage or contribute to retirement?

Post by Hyperchicken »

Quentin__Tarantulino wrote: Thu Jan 26, 2023 3:27 pm [...]
Combined income is $80k.
[...]
We budget pretty well and get back a tax refund in the range of about $15k each year.
[...]
Maybe offtopic but this gave me a pause. Why are you so grossly over-withholding your taxes?
Grt2bOutdoors
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Re: Pay down mortgage or contribute to retirement?

Post by Grt2bOutdoors »

No one has asked this question yet, how secure is your job? I would rather see you hold onto some liquidity in a taxable account rather than lock it up in an illiquid asset that will still have a mortgage on it in 9 years. How much in expenses are you holding in your emergency fund or other taxable accounts?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
capran
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Re: Pay down mortgage or contribute to retirement?

Post by capran »

KlangFool wrote: Thu Jan 26, 2023 9:57 pm
capran wrote: Thu Jan 26, 2023 9:16 pm
Quentin__Tarantulino wrote: Thu Jan 26, 2023 3:27 pm I know that the general advice is to fund your retirement before paying down a mortgage aggressively, but I might be in a bit of a different situation. I’m 38, partner is 32. Combined income is $80k. The mortgage is about $283k and is 4.375% now, but is a 10/1 ARM. We’re one year in, so there is nine years left of fixed rate before it goes adjustable and, I assume, will go up. This was probably a bad decision, but I justified it at the time thinking I could refinance at 7-9 years if the rates were good.

We budget pretty well and get back a tax refund in the range of about $15k each year. A mortgage calculator indicates that if we put $15k extra per year toward the mortgage, it would be paid off at about 12 years, meaning the amount remaining after 10 years would be pretty negligible when the rate can start to rise.

Right now we have about $75k saved in retirement accounts, mostly a traditional IRA. I’m saving 7% to my 401k, my wife saves 3% for the match. We makes about the same wage. Should we be increasing our 401k contributions? Increase the IRA, which is just rolled over funds from previous jobs’ 401k’s? Open a Roth IRA? Or pay the mortgage down? Just don’t want to be stuck with a huge rate increase in 10 years.
We did a budget freeze when we were young which enabled us to do both- pay off the mortgage and max out retirement accounts. Of course, back then, our house was 9 1/2% interest. But all along everyone said we should not pay off the mortgage. But we have no regrets doing so. Once that mortgage was gone we literally felt like money was growing on trees! We also felt it was like life insurance. If one of us passed young, the others income could still be more than enough with no house payment.
capran,

Would you mind telling us the price of the house versus your gross household income at that time? 2X? 3X? 5X?

KlangFool
First house: 1978: 34,000 @ 9 1/2% ,gross income for two new college graduates 1,298. So I guess the 34k house was 2x15,576 gross income (We both started fresh out of college at 649 each at a group home). House payment was 315. As we got raises, we put that full amount to the house. A budget freeze works best if you are just starting out. Rolled over 34k sales price (yes, stayed flat for ten years) as down for house #2. 1989: bought #2 for 75,000. 7.5% interest rate. Had to check our SS statements to get our gross, as it was a less vivid time of our lives. Hers - 23,945, mine -23,638. Sold after 4 years for 133k. Bought a 33k boat and put the rest as down for house #3 in 1993: House #3 186,000 Variable 5 yr rate at 5 3/4% hers -37,853 mine- 35,425. Paid it off in less than 4 years. I was in grad school and finished my MS in 79. She finished her MSW in 83. Our budget freeze allowed us to get debt paid off and contribute to 403b/tax deferred school retirement and max Roths. We just got used to spending less, because less was all we had to start with. (and that first house was horrible. Poorest area in town and so poorly insulated we paid over 300 a month in winter for electric heat (and the house never got warmer than 62). We still only spend a fraction of our gross income. As you know from my prior posts, we have a MAGI re:IRMAA of a little over 200k. That does not include the untaxed portion of my SS (3800). last year regular spending all bills, credit cards, taxes insurance etc was 53k plus 28k for income taxes.
KlangFool
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Re: Pay down mortgage or contribute to retirement?

Post by KlangFool »

capran wrote: Thu Jan 26, 2023 10:53 pm
KlangFool wrote: Thu Jan 26, 2023 9:57 pm
capran wrote: Thu Jan 26, 2023 9:16 pm
Quentin__Tarantulino wrote: Thu Jan 26, 2023 3:27 pm I know that the general advice is to fund your retirement before paying down a mortgage aggressively, but I might be in a bit of a different situation. I’m 38, partner is 32. Combined income is $80k. The mortgage is about $283k and is 4.375% now, but is a 10/1 ARM. We’re one year in, so there is nine years left of fixed rate before it goes adjustable and, I assume, will go up. This was probably a bad decision, but I justified it at the time thinking I could refinance at 7-9 years if the rates were good.

We budget pretty well and get back a tax refund in the range of about $15k each year. A mortgage calculator indicates that if we put $15k extra per year toward the mortgage, it would be paid off at about 12 years, meaning the amount remaining after 10 years would be pretty negligible when the rate can start to rise.

Right now we have about $75k saved in retirement accounts, mostly a traditional IRA. I’m saving 7% to my 401k, my wife saves 3% for the match. We makes about the same wage. Should we be increasing our 401k contributions? Increase the IRA, which is just rolled over funds from previous jobs’ 401k’s? Open a Roth IRA? Or pay the mortgage down? Just don’t want to be stuck with a huge rate increase in 10 years.
We did a budget freeze when we were young which enabled us to do both- pay off the mortgage and max out retirement accounts. Of course, back then, our house was 9 1/2% interest. But all along everyone said we should not pay off the mortgage. But we have no regrets doing so. Once that mortgage was gone we literally felt like money was growing on trees! We also felt it was like life insurance. If one of us passed young, the others income could still be more than enough with no house payment.
capran,

Would you mind telling us the price of the house versus your gross household income at that time? 2X? 3X? 5X?

KlangFool
First house: 1978: 34,000 @ 9 1/2% ,gross income for two new college graduates 1,298. So I guess the 34k house was 2x15,576 gross income (We both started fresh out of college at 649 each at a group home). House payment was 315. As we got raises, we put that full amount to the house. A budget freeze works best if you are just starting out. Rolled over 34k sales price (yes, stayed flat for ten years) as down for house #2. 1989: bought #2 for 75,000. 7.5% interest rate. Had to check our SS statements to get our gross, as it was a less vivid time of our lives. Hers - 23,945, mine -23,638. Sold after 4 years for 133k. Bought a 33k boat and put the rest as down for house #3 in 1993: House #3 186,000 Variable 5 yr rate at 5 3/4% hers -37,853 mine- 35,425. Paid it off in less than 4 years. I was in grad school and finished my MS in 79. She finished her MSW in 83. Our budget freeze allowed us to get debt paid off and contribute to 403b/tax deferred school retirement and max Roths. We just got used to spending less, because less was all we had to start with. (and that first house was horrible. Poorest area in town and so poorly insulated we paid over 300 a month in winter for electric heat (and the house never got warmer than 62). We still only spend a fraction of our gross income. As you know from my prior posts, we have a MAGI re:IRMAA of a little over 200k. That does not include the untaxed portion of my SS (3800). last year regular spending all bills, credit cards, taxes insurance etc was 53k plus 28k for income taxes.
Thanks.

In summary, you didn't buy your house at 3.5X of the gross household income.

KlangFool
Last edited by KlangFool on Fri Jan 27, 2023 7:03 am, edited 1 time in total.
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Beachey
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Re: Pay down mortgage or contribute to retirement?

Post by Beachey »

Harmanic wrote: Thu Jan 26, 2023 4:22 pm
A lot can happen in 10 years. One thing for certain, any possible increase will be paid on a much smaller principal balance. So if your rate was 1% below a 30 year fixed and IF rates are higher in 10 years (a big IF), then you will still likely end up ahead.

ARM mortgages can be great in high interest rate environments. We used an ARM for our house and saved over $100,000 in interest and were able to pay off the house 10 years earlier than expected.
I agree with this, I think I have had six mortgages over four houses, and the longest I have kept a mortgage is about 8 years. I highly suspect over the next 7-9 years you will be able to refinance lower if you are still living in this house.
capran
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Re: Pay down mortgage or contribute to retirement?

Post by capran »

KlangFool wrote: Fri Jan 27, 2023 6:39 am
capran wrote: Thu Jan 26, 2023 10:53 pm
KlangFool wrote: Thu Jan 26, 2023 9:57 pm
capran wrote: Thu Jan 26, 2023 9:16 pm
Quentin__Tarantulino wrote: Thu Jan 26, 2023 3:27 pm I know that the general advice is to fund your retirement before paying down a mortgage aggressively, but I might be in a bit of a different situation. I’m 38, partner is 32. Combined income is $80k. The mortgage is about $283k and is 4.375% now, but is a 10/1 ARM. We’re one year in, so there is nine years left of fixed rate before it goes adjustable and, I assume, will go up. This was probably a bad decision, but I justified it at the time thinking I could refinance at 7-9 years if the rates were good.

We budget pretty well and get back a tax refund in the range of about $15k each year. A mortgage calculator indicates that if we put $15k extra per year toward the mortgage, it would be paid off at about 12 years, meaning the amount remaining after 10 years would be pretty negligible when the rate can start to rise.

Right now we have about $75k saved in retirement accounts, mostly a traditional IRA. I’m saving 7% to my 401k, my wife saves 3% for the match. We makes about the same wage. Should we be increasing our 401k contributions? Increase the IRA, which is just rolled over funds from previous jobs’ 401k’s? Open a Roth IRA? Or pay the mortgage down? Just don’t want to be stuck with a huge rate increase in 10 years.
We did a budget freeze when we were young which enabled us to do both- pay off the mortgage and max out retirement accounts. Of course, back then, our house was 9 1/2% interest. But all along everyone said we should not pay off the mortgage. But we have no regrets doing so. Once that mortgage was gone we literally felt like money was growing on trees! We also felt it was like life insurance. If one of us passed young, the others income could still be more than enough with no house payment.
capran,

Would you mind telling us the price of the house versus your gross household income at that time? 2X? 3X? 5X?

KlangFool
First house: 1978: 34,000 @ 9 1/2% ,gross income for two new college graduates 1,298. So I guess the 34k house was 2x15,576 gross income (We both started fresh out of college at 649 each at a group home). House payment was 315. As we got raises, we put that full amount to the house. A budget freeze works best if you are just starting out. Rolled over 34k sales price (yes, stayed flat for ten years) as down for house #2. 1989: bought #2 for 75,000. 7.5% interest rate. Had to check our SS statements to get our gross, as it was a less vivid time of our lives. Hers - 23,945, mine -23,638. Sold after 4 years for 133k. Bought a 33k boat and put the rest as down for house #3 in 1993: House #3 186,000 Variable 5 yr rate at 5 3/4% hers -37,853 mine- 35,425. Paid it off in less than 4 years. I was in grad school and finished my MS in 79. She finished her MSW in 83. Our budget freeze allowed us to get debt paid off and contribute to 403b/tax deferred school retirement and max Roths. We just got used to spending less, because less was all we had to start with. (and that first house was horrible. Poorest area in town and so poorly insulated we paid over 300 a month in winter for electric heat (and the house never got warmer than 62). We still only spend a fraction of our gross income. As you know from my prior posts, we have a MAGI re:IRMAA of a little over 200k. That does not include the untaxed portion of my SS (3800). last year regular spending all bills, credit cards, taxes insurance etc was 53k plus 28k for income taxes.
Thanks.

In summary, you didn't buy your house at 3.5X of the gross household income.

KlangFool
no. We always bought a cheaper house. We certainly could have afforded more which would have reduced our opportunity to pay down the mortgage. At just 2X. However, the principal is the same. Lets take for example the very recent huge increases in real estate. Son just bought his first house at 370,000. his just out of college income was 94,000. Now if his girlfriend had his job (she is not yet certified) the dual income would be 188k, which if my math is correct, which would be about the same gross pay to home price ratio as we faced in 1977. Or is my math way off (which has always been my worst subject? If our dual income was 15,576 and house 34,000 and in todays inflated wages and real estate market a dual income of 188,000 buying a 370,000 house, are those ratios similar? Of course, had we been a single income, or bought a more expensive house, that would change the equation considerably.
KlangFool
Posts: 31426
Joined: Sat Oct 11, 2008 12:35 pm

Re: Pay down mortgage or contribute to retirement?

Post by KlangFool »

capran wrote: Fri Jan 27, 2023 10:21 am

no. We always bought a cheaper house. We certainly could have afforded more which would have reduced our opportunity to pay down the mortgage. At just 2X. However, the principal is the same. Lets take for example the very recent huge increases in real estate. Son just bought his first house at 370,000. his just out of college income was 94,000. Now if his girlfriend had his job (she is not yet certified) the dual income would be 188k, which if my math is correct, which would be about the same gross pay to home price ratio as we faced in 1977. Or is my math way off (which has always been my worst subject? If our dual income was 15,576 and house 34,000 and in todays inflated wages and real estate market a dual income of 188,000 buying a 370,000 house, are those ratios similar? Of course, had we been a single income, or bought a more expensive house, that would change the equation considerably.
capran,

Then, they would upgrade and buy a new house at 3.5X of 188K = 658K house. This is how normally happen. If they do not upgrade, they would be doing very well.

KlangFool
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tashnewbie
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Re: Pay down mortgage or contribute to retirement?

Post by tashnewbie »

I agree with others who have said a lot can happen over the remaining 9 years of this 10/1 ARM. Even if you make big lump sum payments towards the mortgage, you'd still have >$150k left at the end of 9 years.

I wouldn't be in a rush to make bigger payments. I would shore up my emergency fund and probably invest more in 401k/Roth IRA.

I would make the standard house payments. Then over the next 9 years, if interest rates come down, I would refinance. If interest rates stay the same or increase, it won't be the end of the world because it'll be on a much smaller balance.
capran
Posts: 1074
Joined: Thu Feb 18, 2016 9:45 am

Re: Pay down mortgage or contribute to retirement?

Post by capran »

KlangFool wrote: Fri Jan 27, 2023 10:32 am
capran wrote: Fri Jan 27, 2023 10:21 am

no. We always bought a cheaper house. We certainly could have afforded more which would have reduced our opportunity to pay down the mortgage. At just 2X. However, the principal is the same. Lets take for example the very recent huge increases in real estate. Son just bought his first house at 370,000. his just out of college income was 94,000. Now if his girlfriend had his job (she is not yet certified) the dual income would be 188k, which if my math is correct, which would be about the same gross pay to home price ratio as we faced in 1977. Or is my math way off (which has always been my worst subject? If our dual income was 15,576 and house 34,000 and in todays inflated wages and real estate market a dual income of 188,000 buying a 370,000 house, are those ratios similar? Of course, had we been a single income, or bought a more expensive house, that would change the equation considerably.
capran,

Then, they would upgrade and buy a new house at 3.5X of 188K = 658K house. This is how normally happen. If they do not upgrade, they would be doing very well.

KlangFool
Quite honestly, I do often look back with some regret that we lived too far below our means. When we bought that first house, it took months of shopping to find one so cheap. We easily could have doubled our budget which would have hindered our ability to move forward as described. For that matter, I even regret buying our first little ocean capable boat in 86. for 8,000. It would have been much more comfortable to double our spending for that, but making frugal choices did put us ahead.
KlangFool
Posts: 31426
Joined: Sat Oct 11, 2008 12:35 pm

Re: Pay down mortgage or contribute to retirement?

Post by KlangFool »

capran wrote: Fri Jan 27, 2023 10:41 am
KlangFool wrote: Fri Jan 27, 2023 10:32 am
capran wrote: Fri Jan 27, 2023 10:21 am

no. We always bought a cheaper house. We certainly could have afforded more which would have reduced our opportunity to pay down the mortgage. At just 2X. However, the principal is the same. Lets take for example the very recent huge increases in real estate. Son just bought his first house at 370,000. his just out of college income was 94,000. Now if his girlfriend had his job (she is not yet certified) the dual income would be 188k, which if my math is correct, which would be about the same gross pay to home price ratio as we faced in 1977. Or is my math way off (which has always been my worst subject? If our dual income was 15,576 and house 34,000 and in todays inflated wages and real estate market a dual income of 188,000 buying a 370,000 house, are those ratios similar? Of course, had we been a single income, or bought a more expensive house, that would change the equation considerably.
capran,

Then, they would upgrade and buy a new house at 3.5X of 188K = 658K house. This is how normally happen. If they do not upgrade, they would be doing very well.

KlangFool
Quite honestly, I do often look back with some regret that we lived too far below our means. When we bought that first house, it took months of shopping to find one so cheap. We easily could have doubled our budget which would have hindered our ability to move forward as described. For that matter, I even regret buying our first little ocean capable boat in 86. for 8,000. It would have been much more comfortable to double our spending for that, but making frugal choices did put us ahead.
capran,

You are a very lucky person. I had seen too many people financially destroyed by their houses. You had survived your house in order to enjoy your regret. Too many did not survive.

"We easily could have doubled our budget which would have hindered our ability to move forward as described."

Or, you could had hit a bad sequence of events and lost it all like many of my peers.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
ZWorkLess
Posts: 425
Joined: Thu May 04, 2017 8:13 pm

Re: Pay down mortgage or contribute to retirement?

Post by ZWorkLess »

First off, I hate ARMs, so for me, with an ARM, I absolutely would pay it down instead of doing retirement savings beyond those needed to obtain any company match available. The only alternative place I'd put your excess earnings is into an emergency fund. Once you have a big enough emergency fund, you can always tap THAT to pay down your ARM either before or after the variable rate resets.

So, first task: Decide how much of an emergency fund you need. And where do you want to keep that? Safe AND liquid places include savings accounts, CDs, money markets, cash under mattress (joke, sort of), or I bonds (with a caveat about liquidity for the first 12 months).

If you don't already have a 6+ month expenses "liquid" savings (outside a retirement account), then you need to address that. Any number of things can occur (job loss, illness, kids, need to move, etc.) that could put you in a tight financial spot, so make sure you've got money OUTSIDE retirement accounts to access for things like that.

A happy medium approach for that 15k, the one I'd probably choose (and you don't have any reason to think you need a lot of emergency cash in the next 12 months), is to leave the mortgage be for now, but start dumping that extra money into I bonds, especially as long as they're paying more than the 5% you'd "earn" by paying down your mortgage.

So, I'd put that 15k into I bonds (20k max per calendar year for the two of you combined), then I'd reduce my withholdings at work and save that $1200/mo in cash for a cash savings, converting all of it to I bonds to the greatest extent possible (say your remaining $5k for 2023 once you save that much, then keep the rest in cash until Jan 2024, when you can start buying your 20k worth of 2024 I bonds. Once each contribution "ages" for 12 months, then you can access the cash at any day, no penalty, so once you get this rolling, all but your most recent 12 months contributions will be easily "liquid" in case of emergency. This (I bonds) is what I'm doing with my own emergency funds (plus as much as I can add for all purpose bond investing).

Over time, if interest rates crater and you're getting less on I bonds than the 5% you'd need to "earn" to make up for not paying down your mortgage (or if rates are still high when your ARM resets), then you can take your "extra" I bond money (beyond what you want/need for emergency savings) and use THAT to pay down your ARM when desired.

Having an automated savings like that can be really powerful. Even better than 15k in one tax return is that cash in your pocket when you earn it, and then immediately get that cash into a savings plan. I do that for both our business and home, just transferring cash from main checking/operating accounts to "savings" on a schedule, just like having your IRA contributions withheld and thereby automated every month. You get so used to it that you don't miss the money.

You'll need to open accounts at Treasury Direct to hold your I bonds. There's tons of good info out there about the wonders of I bonds, so I won't try to explain them, but a quick google will land you lots of great info.

Good luck!!!
capran
Posts: 1074
Joined: Thu Feb 18, 2016 9:45 am

Re: Pay down mortgage or contribute to retirement?

Post by capran »

KlangFool wrote: Fri Jan 27, 2023 10:50 am
capran wrote: Fri Jan 27, 2023 10:41 am
KlangFool wrote: Fri Jan 27, 2023 10:32 am
capran wrote: Fri Jan 27, 2023 10:21 am

no. We always bought a cheaper house. We certainly could have afforded more which would have reduced our opportunity to pay down the mortgage. At just 2X. However, the principal is the same. Lets take for example the very recent huge increases in real estate. Son just bought his first house at 370,000. his just out of college income was 94,000. Now if his girlfriend had his job (she is not yet certified) the dual income would be 188k, which if my math is correct, which would be about the same gross pay to home price ratio as we faced in 1977. Or is my math way off (which has always been my worst subject? If our dual income was 15,576 and house 34,000 and in todays inflated wages and real estate market a dual income of 188,000 buying a 370,000 house, are those ratios similar? Of course, had we been a single income, or bought a more expensive house, that would change the equation considerably.
capran,

Then, they would upgrade and buy a new house at 3.5X of 188K = 658K house. This is how normally happen. If they do not upgrade, they would be doing very well.

KlangFool
Quite honestly, I do often look back with some regret that we lived too far below our means. When we bought that first house, it took months of shopping to find one so cheap. We easily could have doubled our budget which would have hindered our ability to move forward as described. For that matter, I even regret buying our first little ocean capable boat in 86. for 8,000. It would have been much more comfortable to double our spending for that, but making frugal choices did put us ahead.
capran,

You are a very lucky person. I had seen too many people financially destroyed by their houses. You had survived your house in order to enjoy your regret. Too many did not survive.

"We easily could have doubled our budget which would have hindered our ability to move forward as described."

Or, you could had hit a bad sequence of events and lost it all like many of my peers.

KlangFool
That is true. Interestingly, we did have a scare in about 2010. The school district gave pink slips to every single counselor and social worker. At that time, I had 23 years in and spouse 27 years. And we had our youngest in college. Turned out that it was an attempt at budget manipulation to sway public opinion and legislators and literally, just a few days before school started, they "hired" us all back. We could have survived with the house paid off, but it was stressful. But that was our main purpose of living below our means.
Topic Author
Quentin__Tarantulino
Posts: 7
Joined: Thu Jan 26, 2023 3:02 pm

Re: Pay down mortgage or contribute to retirement?

Post by Quentin__Tarantulino »

capran wrote: Fri Jan 27, 2023 11:38 am
KlangFool wrote: Fri Jan 27, 2023 10:50 am
capran wrote: Fri Jan 27, 2023 10:41 am
KlangFool wrote: Fri Jan 27, 2023 10:32 am
capran wrote: Fri Jan 27, 2023 10:21 am

no. We always bought a cheaper house. We certainly could have afforded more which would have reduced our opportunity to pay down the mortgage. At just 2X. However, the principal is the same. Lets take for example the very recent huge increases in real estate. Son just bought his first house at 370,000. his just out of college income was 94,000. Now if his girlfriend had his job (she is not yet certified) the dual income would be 188k, which if my math is correct, which would be about the same gross pay to home price ratio as we faced in 1977. Or is my math way off (which has always been my worst subject? If our dual income was 15,576 and house 34,000 and in todays inflated wages and real estate market a dual income of 188,000 buying a 370,000 house, are those ratios similar? Of course, had we been a single income, or bought a more expensive house, that would change the equation considerably.
capran,

Then, they would upgrade and buy a new house at 3.5X of 188K = 658K house. This is how normally happen. If they do not upgrade, they would be doing very well.

KlangFool
Quite honestly, I do often look back with some regret that we lived too far below our means. When we bought that first house, it took months of shopping to find one so cheap. We easily could have doubled our budget which would have hindered our ability to move forward as described. For that matter, I even regret buying our first little ocean capable boat in 86. for 8,000. It would have been much more comfortable to double our spending for that, but making frugal choices did put us ahead.
capran,

You are a very lucky person. I had seen too many people financially destroyed by their houses. You had survived your house in order to enjoy your regret. Too many did not survive.

"We easily could have doubled our budget which would have hindered our ability to move forward as described."

Or, you could had hit a bad sequence of events and lost it all like many of my peers.

KlangFool
That is true. Interestingly, we did have a scare in about 2010. The school district gave pink slips to every single counselor and social worker. At that time, I had 23 years in and spouse 27 years. And we had our youngest in college. Turned out that it was an attempt at budget manipulation to sway public opinion and legislators and literally, just a few days before school started, they "hired" us all back. We could have survived with the house paid off, but it was stressful. But that was our main purpose of living below our means.
That’s the kind of thing that scares me. My wife and I both have super secure jobs, but you never know. I feel like it would give peace of mind to have the house paid off sooner, or close to it, but I realize what people are saying about the math behind 401k and IRAs. It’s like my heart and head are in competition.
KlangFool
Posts: 31426
Joined: Sat Oct 11, 2008 12:35 pm

Re: Pay down mortgage or contribute to retirement?

Post by KlangFool »

Quentin__Tarantulino wrote: Fri Jan 27, 2023 4:24 pm
capran wrote: Fri Jan 27, 2023 11:38 am
KlangFool wrote: Fri Jan 27, 2023 10:50 am
capran wrote: Fri Jan 27, 2023 10:41 am
KlangFool wrote: Fri Jan 27, 2023 10:32 am

capran,

Then, they would upgrade and buy a new house at 3.5X of 188K = 658K house. This is how normally happen. If they do not upgrade, they would be doing very well.

KlangFool
Quite honestly, I do often look back with some regret that we lived too far below our means. When we bought that first house, it took months of shopping to find one so cheap. We easily could have doubled our budget which would have hindered our ability to move forward as described. For that matter, I even regret buying our first little ocean capable boat in 86. for 8,000. It would have been much more comfortable to double our spending for that, but making frugal choices did put us ahead.
capran,

You are a very lucky person. I had seen too many people financially destroyed by their houses. You had survived your house in order to enjoy your regret. Too many did not survive.

"We easily could have doubled our budget which would have hindered our ability to move forward as described."

Or, you could had hit a bad sequence of events and lost it all like many of my peers.

KlangFool
That is true. Interestingly, we did have a scare in about 2010. The school district gave pink slips to every single counselor and social worker. At that time, I had 23 years in and spouse 27 years. And we had our youngest in college. Turned out that it was an attempt at budget manipulation to sway public opinion and legislators and literally, just a few days before school started, they "hired" us all back. We could have survived with the house paid off, but it was stressful. But that was our main purpose of living below our means.
That’s the kind of thing that scares me. My wife and I both have super secure jobs, but you never know. I feel like it would give peace of mind to have the house paid off sooner, or close to it, but I realize what people are saying about the math behind 401k and IRAs. It’s like my heart and head are in competition.
Quentin__Tarantulino,

You missed something very important in this discussion.

A) Poster, "capran", bought a house at 2X of his gross household income. Hence, he can max up his retirement accounts and pay down the mortgage.

B) You bought a house at 3.5X of your gross household income. You bought a lot more houses. Hence, it is not safe to pay down the house. You did not even max up all your tax-advantaged accounts.

C) It is too late now. If you want to have a peace of mind, you should had bought a lot less houses. Paying down the 3.5X house is not safe for you. It leaves you less liquidity and pay a lot more taxes.

D) My daughter and her spouse would be buying a 2X house.

KlangFool
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KlangFool
Posts: 31426
Joined: Sat Oct 11, 2008 12:35 pm

Re: Pay down mortgage or contribute to retirement?

Post by KlangFool »

OP,

A) Usually, people that are nervous about paying their mortgage are those people bought a lot more houses. But, they are the kind of people that should not pay down mortgages. It is not safe for them. They bought too much house and tying up more money into the house is a recipe for disaster. They need more money outside the house.

B) My mortgage payment (PITI) at around $1,800 per month was substantially cheaper than the market rent of $2,300 to $2,500 per month. I was in no hurry to pay off my mortgage until I am financially independent. I made money from imputed rent.

"The mortgage is about $283k and is 4.375% now,
Right now we have about $75k saved in retirement accounts,"

C) You have about a 400K house. And, your portfolio is less than 100K. Why is it safe to put more money into your house?

KlangFool
Last edited by KlangFool on Fri Jan 27, 2023 5:22 pm, edited 1 time in total.
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Kuota Rider
Posts: 156
Joined: Mon Jul 05, 2010 1:10 pm

Re: Pay down mortgage or contribute to retirement?

Post by Kuota Rider »

Nothing compares to the feeling of putting your head on your pillow at night....with a paid off house!
KlangFool
Posts: 31426
Joined: Sat Oct 11, 2008 12:35 pm

Re: Pay down mortgage or contribute to retirement?

Post by KlangFool »

Kuota Rider wrote: Fri Jan 27, 2023 5:19 pm Nothing compares to the feeling of putting your head on your pillow at night....with a paid off house!
Kuota Rider,

"The mortgage is about $283k and is 4.375% now, but is a 10/1 ARM.

Right now we have about $75k saved in retirement accounts,"

1) OP is not paying off the house. OP is paying down the mortgage

2) OP has a 400K house with a portfolio less than 100K.

3) Why would OP "Sleep Well At Night" (SWAN) by paying down the mortgage? In fact, OP is more likely to lose the house by paying down the mortgage.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Kuota Rider
Posts: 156
Joined: Mon Jul 05, 2010 1:10 pm

Re: Pay down mortgage or contribute to retirement?

Post by Kuota Rider »

I am simply relaying what happens when my head meets my pillow. Have a nice weekend :)
ActiveIndexer
Posts: 57
Joined: Thu Feb 18, 2021 8:33 am
Location: Pennsylvania

Re: Pay down mortgage or contribute to retirement?

Post by ActiveIndexer »

KlangFool wrote: Thu Jan 26, 2023 4:13 pm
Quentin__Tarantulino wrote: Thu Jan 26, 2023 3:27 pm
I’m saving 7% to my 401k, my wife saves 3% for the match.
Quentin__Tarantulino,

1) 401K and IRA are not retirement accounts. They are tax-advantaged accounts. You can take money out tax-free and penalty-free before 59 1/2 years old.

https://www.madfientist.com/how-to-acce ... nds-early/

2) You and your spouse did not max up your 401K.

3) What is your marginal tax rate?

4) Do you pay state income tax?

5) How does it makes any sense for you to pay 10+% Federal and state income taxes in order to save 4.375% mortgage interest? 10+% taxes is bigger than 4.375%.

A) Pay 10K towards mortgage and save 4.375% interest.

B) Contribute 10K to 401K and save 10+% taxes.

Why (A) is better than (B)?

KlangFool
Had not thought of it this way. We are looking to purchase a SFH and I am blown away by the monthly payments people are taking on. I hate the idea of paying more than $2500/mo, which is easy to do with rates at or above 6%. Have been trying to get insight on what to do once we land a house and your comment solved it.

I think that’s the second time in a week or so you taught me something new- thank you!
milktoast
Posts: 625
Joined: Wed Jul 10, 2019 8:17 pm

Re: Pay down mortgage or contribute to retirement?

Post by milktoast »

ARMs are great. Good for you. I’m totally serious.

You saved 1.2% now and every year for 9 more years. Even in the worst case adjustment, you are probably ahead until year 12-13.

But in the highly likely event that 15yr fixed rates drop in next 9 years, you can refinance and remain ahead forever. Or you could be a typical American and end up moving by then.

In the mean time, build up an emergency fund and retirement savings. Work hard and get pay raises.
CMD1
Posts: 179
Joined: Tue Nov 28, 2017 7:10 pm

Re: Pay down mortgage or contribute to retirement?

Post by CMD1 »

Re: 3.5x vs 2x. Great if you live in a market that you can fit in this box but in hcol coastal areas this is a dream for most. In our market you can't get a shack for that. Medium home prices 800-1m, medium household income in the low 100k. Take a nice 200k income and your at least 4x. Yet there is a 30 year record of incredible housing appreciation and lack of houses in this area. No guarantee for the future of course.
2Scoops
Posts: 238
Joined: Sun Jul 26, 2020 7:01 pm

Re: Pay down mortgage or contribute to retirement?

Post by 2Scoops »

I love the idea of paying down my mortgage. The SWAN feeling of having that behind me is really attractive. That said, my interest rate is 1.75% so there's virtually no value in doing so from a purely financial perspective. Payoff timeline is 2036 if I don't accelerate payments.

Instead, I opened up a separate taxable account a Fido to stash money in whenever I feel the urge to make additional payments to principle. Yes, this money is invested (50/50 TSM/MM) so I'm taking on risk, but I still see it as a better alternative to paying down the mortgage. If and when this account has enough in it to pay down the mortgage I'll make that decision based on a variety of factors. My best guess is that won't come in to play for another 5-8 years.
KlangFool
Posts: 31426
Joined: Sat Oct 11, 2008 12:35 pm

Re: Pay down mortgage or contribute to retirement?

Post by KlangFool »

CMD1 wrote: Sat Jan 28, 2023 2:02 am Re: 3.5x vs 2x. Great if you live in a market that you can fit in this box but in hcol coastal areas this is a dream for most. In our market you can't get a shack for that. Medium home prices 800-1m, medium household income in the low 100k. Take a nice 200k income and your at least 4x. Yet there is a 30 year record of incredible housing appreciation and lack of houses in this area. No guarantee for the future of course.
Then, rent. Don't buy. Or, move away from that market.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
sandan
Posts: 629
Joined: Wed Apr 03, 2013 12:48 pm

Re: Pay down mortgage or contribute to retirement?

Post by sandan »

I think you need to move forward with tax planning to make a good decision.

Since it appears you may be in the 12% bracket (80k-27k standard deduction), I think there is little benefit in contributing to "traditional" 401ks beyond a match.

There is a good chance maxing an HSA & roth IRA are better alternatives than contributing additional amounts to a traditional 401k.

see this link for the marginal tax bracket. https://www.forbes.com/advisor/taxes/ta ... ou're%20in.
CMD1
Posts: 179
Joined: Tue Nov 28, 2017 7:10 pm

Re: Pay down mortgage or contribute to retirement?

Post by CMD1 »

KlangFool wrote: Sat Jan 28, 2023 6:22 am
CMD1 wrote: Sat Jan 28, 2023 2:02 am Re: 3.5x vs 2x. Great if you live in a market that you can fit in this box but in hcol coastal areas this is a dream for most. In our market you can't get a shack for that. Medium home prices 800-1m, medium household income in the low 100k. Take a nice 200k income and your at least 4x. Yet there is a 30 year record of incredible housing appreciation and lack of houses in this area. No guarantee for the future of course.
Then, rent. Don't buy. Or, move away from that market.

KlangFool
It's great advice, at least on paper and I agree. But I've also tried both(living in other cities where you make less often times and your income doesn't grow as fast) and renting where you face lots of double digit % rent increased. Ultimately decided to buy above my pay grade with a sweet ADU apartment to offset the mortgage.
8301
Posts: 942
Joined: Thu Dec 22, 2022 1:52 pm

Re: Pay down mortgage or contribute to retirement?

Post by 8301 »

CMD1 wrote: Sun Jan 29, 2023 12:07 am
KlangFool wrote: Sat Jan 28, 2023 6:22 am
CMD1 wrote: Sat Jan 28, 2023 2:02 am Re: 3.5x vs 2x. Great if you live in a market that you can fit in this box but in hcol coastal areas this is a dream for most. In our market you can't get a shack for that. Medium home prices 800-1m, medium household income in the low 100k. Take a nice 200k income and your at least 4x. Yet there is a 30 year record of incredible housing appreciation and lack of houses in this area. No guarantee for the future of course.
Then, rent. Don't buy. Or, move away from that market.

KlangFool
It's great advice, at least on paper and I agree. But I've also tried both(living in other cities where you make less often times and your income doesn't grow as fast) and renting where you face lots of double digit % rent increased. Ultimately decided to buy above my pay grade with a sweet ADU apartment to offset the mortgage.
Whether 2x, 3.5x, or x? depends on many factors. You cannot pull something out of the thin air and hold on to it religiously. I don't want to live in dogma, but a life.
KlangFool
Posts: 31426
Joined: Sat Oct 11, 2008 12:35 pm

Re: Pay down mortgage or contribute to retirement?

Post by KlangFool »

CMD1 wrote: Sun Jan 29, 2023 12:07 am
KlangFool wrote: Sat Jan 28, 2023 6:22 am
CMD1 wrote: Sat Jan 28, 2023 2:02 am Re: 3.5x vs 2x. Great if you live in a market that you can fit in this box but in hcol coastal areas this is a dream for most. In our market you can't get a shack for that. Medium home prices 800-1m, medium household income in the low 100k. Take a nice 200k income and your at least 4x. Yet there is a 30 year record of incredible housing appreciation and lack of houses in this area. No guarantee for the future of course.
Then, rent. Don't buy. Or, move away from that market.

KlangFool
It's great advice, at least on paper and I agree. But I've also tried both(living in other cities where you make less often times and your income doesn't grow as fast) and renting where you face lots of double digit % rent increased. Ultimately decided to buy above my pay grade with a sweet ADU apartment to offset the mortgage.
You have to provide more details. I live in DC/Northern Virginia area. I don't see the California or West Coast provide higher pay or growth. It is just higher cost.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
8301
Posts: 942
Joined: Thu Dec 22, 2022 1:52 pm

Re: Pay down mortgage or contribute to retirement?

Post by 8301 »

KlangFool wrote: Sun Jan 29, 2023 6:24 am
CMD1 wrote: Sun Jan 29, 2023 12:07 am
KlangFool wrote: Sat Jan 28, 2023 6:22 am
CMD1 wrote: Sat Jan 28, 2023 2:02 am Re: 3.5x vs 2x. Great if you live in a market that you can fit in this box but in hcol coastal areas this is a dream for most. In our market you can't get a shack for that. Medium home prices 800-1m, medium household income in the low 100k. Take a nice 200k income and your at least 4x. Yet there is a 30 year record of incredible housing appreciation and lack of houses in this area. No guarantee for the future of course.
Then, rent. Don't buy. Or, move away from that market.

KlangFool
It's great advice, at least on paper and I agree. But I've also tried both(living in other cities where you make less often times and your income doesn't grow as fast) and renting where you face lots of double digit % rent increased. Ultimately decided to buy above my pay grade with a sweet ADU apartment to offset the mortgage.
You have to provide more details. I live in DC/Northern Virginia area. I don't see the California or West Coast provide higher pay or growth. It is just higher cost.

KlangFool
Of course, not every job. It depends on the the kind of jobs you are qualified for.
azphx1972
Posts: 73
Joined: Mon May 02, 2011 8:32 am

Re: Pay down mortgage or contribute to retirement?

Post by azphx1972 »

KlangFool wrote: Fri Jan 27, 2023 5:00 pm A) Usually, people that are nervous about paying their mortgage are those people bought a lot more houses. But, they are the kind of people that should not pay down mortgages. It is not safe for them. They bought too much house and tying up more money into the house is a recipe for disaster. They need more money outside the house.]
[...]
[C) You have about a 400K house. And, your portfolio is less than 100K. Why is it safe to put more money into your house?
I agree with KlangFool. I've seen this happen:

1. People pay extra toward their mortgage but then lose their job/income and are forced to sell their house because they can't maintain the mortgage payments. Your mortgage lender doesn't care if you have 360 or 1 payment left, they'll foreclose on you if you can't make the payment.

2. People retire with a paid off house but are investment poor because they prioritized getting rid of their mortgage, and are faced with the difficult decision of selling their home in old age or getting a reverse mortgage to come up with money to pay for living expenses.

OP, if you want to avoid these scenarios, make sure you fully fund retirement first and keep any funds you want to use to prepay the mortgage liquid & accessible until you can pay off the loan in full. Also, at a 12% marginal tax rate I would contribute toward Roth 401k and Roth IRA over their traditional/pre-tax equivalents.
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