Pay off mortgage or make monthly payments and invest the rest?

[Tater86]

Finally along other's advice, I'm in the same boat and putting my money in investment's. I refinanced to a 2.7% rate during covid and maxing out my Roth 401K at work, which has been averaging 10% plus in returns. I've done the math in regards to traditional vs roth and around retirement at 62 if playing the standard, the difference was only around $100K. I value the roth over the traditional because I'm mitigating the risk that I may have a rental property or side business after I "retire".

 

[CorbLand]

This has been a thread I’ve followed with much interest. I wish I could say we were in a similar position to OP but my wife and I have been renting until last year due to knowing we’d be moving every few years for my medical training.

We bought our first house in our 30’s last year and have a 6.375% interest rate, much higher than described in the OP. As a result of that rate, combined with my wife preferring as little debt as possible (peace of mind), we’ve been paying very aggressively on the house.

My question for all of you is a spin off of the original OP in light of our higher interest rate. We are maxing out our 403B and HSA contributions through work for max tax deductions. We DONT itemize our taxes and just take standard deduction so can’t deduct interest from mortgage. We are above the income threshold for standard Roth IRA contributions. This year I toyed with paying less on the house and maxing out a backdoor Roth IRA instead.

What say you Rokslide? Pay down the 6.375% mortgage as aggressively as possible or pay off a bit less in exchange for investing in a Roth (knowing I won’t get the tax benefit since it’s a backdoor Roth).

That is a tough one as the interest rate you are paying compared to others is pretty high but it is not horrible averaged out over the last 30 or so years.

One thing to consider is that compounding interest is the 8th wonder of the world and it works via time. Money compounding for 30 years really adds up. Go look at post 340. Investing 1000 a month at 4% for 30 years nets more funds than investing 3000 a month at 4% for 13 years. Then look at it from the total amount one puts in of their money and what they earn in interest and it gets even more surprising. One was a 90% ROI versus a 30% ROI yet the difference in total amount its worth is less than 100K.

Basically, I would suggest sitting down, running the numbers. Add in your risk appetite and then make a decision and execute it. Executing the plan is pretty important. You can always pivot and change if the need arises but planning is the key. Markets change, situations change, life changes and you have to adjust but planning is the key to get you through all of it.


To everyone, the fact that your even having this conversation with people and can understand both sides, regardless of which camp you may fall in, your further ahead than the vast majority of people.

 

[Jhconnected]

Agreed. Just saving/investing is most important. Making sure it’s invested in a fund with a good return is second.

Do that and your 95% there.

 

[CorbLand]

Having some traditional 401k is a really good thing and can be better than Roth, for some. If you have a large Roth balance and a small traditional balance, you have the possibility of being taxed very low on your traditional.

If you only need to supplement your Roth retirement income with small amounts of traditional, you may fall in a very low taxable income bracket in your retirement years. Take some tax savings during your years of working and also benefit during your retirement years. I personally am about 90% Roth, 10% traditional ( counting company match which is traditional)

This is similar to what I do.

Employer gives me 14.2% in a 401.
I have a Traditional IRA that was rolled over from a previous employer.
I have a Roth IRA that I contribute monthly to.
I have a HSA that I contribute monthly to.

Of the funds outside of my 401 about 15% is in my Trad and the remainder is in my Roth and HSA. Most of my investments are into my HSA and Roth. If my income level increases, I will start taking some tax advantages from the Trad though. Options are good.

 

[CorbLand]

If you were debt free you could easily take a lesser paying job and not worry about making a certain dollar every month to clear your minimum payments either.

If you had money invested, you could take a lower paying job and supplement your needs out of the money invested.

 

[pacoalcracker]

A single investment of $1000 one hundred years ago compounding @10% is worth 32 MILLION today. That $1000 one hundred years ago in todays dollars would be $17,000...kind of crazy isn't it? Compound interest is a real thing.

 

[mostlybirch]

A single investment of $1000 one hundred years ago compounding @10% is worth 32 MILLION today. That $1000 one hundred years ago in todays dollars would be $17,000...kind of crazy isn't it? Compound interest is a real thing.

Compound interest is magic and should be front and center in ones mind when they consider paying down a mortgage early.

 

[Beendare]

....We are above the income threshold for standard Roth IRA contributions.....

^ Thats the key statement in your question, IMO.

You have a higher than avg income that gives you many options...and possibly some restrictions like for example the AMT kicking in and you don't get the full write-off of your mortgage interest.
Anyone making $150k-$200k plus is beyond the basics of these discussions. At that level, tax advantaged decisions can take precedent.

1) In general, paying off debt that is higher than the return you can get is usually the best advice.
2) As is, starting a side business that you can off load after tax expenses to the before tax side.
3) When you get up into the higher income levels, even the type of investments you make matter...an example of that is trading stocks short term where profit goes directly to your income and the tax consequence can easily be 50% or more of your profit PLUS it puts you in an even higher tax bracket and limits even more of your deductions.



.....You sir should talk to a CPA that can outline the different options available to you.

 

[Chipnalong]

My wife and I made the decision to pay off the house vice investing. We did it for the emotional relief of outright ownership.

It’s not all dollars and cents.




P

This ! Everyone told me not to pay the house off but the relief was way worth it . It opens up an I’m in control feeling . I say pay it off .

 

[HuntHarder]

Everyone can do backdoor Roth IRA. It is a little weird that 401k roth has no income limits, but roth IRA's do. Then again, anyone can backdoor Roth, so really not income restrictions per se.

 

[ztc92]

^ Thats the key statement in your question, IMO.

You have a higher than avg income that gives you many options...and possibly some restrictions like for example the AMT kicking in and you don't get the full write-off of your mortgage interest.
Anyone making $150k-$200k plus is beyond the basics of these discussions. At that level, tax advantaged decisions can take precedent.

1) In general, paying off debt that is higher than the return you can get is usually the best advice.
2) As is, starting a side business that you can off load after tax expenses to the before tax side.
3) When you get up into the higher income levels, even the type of investments you make matter...an example of that is trading stocks short term where profit goes directly to your income and the tax consequence can easily be 50% or more of your profit PLUS it puts you in an even higher tax bracket and limits even more of your deductions.



.....You sir should talk to a CPA that can outline the different options available to you.

Thank you, I think you are the only one to pick up on that detail. It does change the equation a bit to be in that position. I’m extremely grateful for our current situation, though I have a healthy amount of student loan debt to show for it. Thankfully that student loan debt is a lower rate than the house so we’re not as focussed on paying it down.

We are fairly new to this situation after many years of low income and long hours but making plans to work with a qualified CPA (and maybe a CFP) is on the to do list in the near future. We live in rural WY so that limits our options quite a bit and we may need to go for something virtual/remote to find what we need.

I’m very interested in point #2 regarding a side business that could help with taxes. Would you be willing to explain more of what you mean by that or point me in the direction of some additional reading I could do about that?

Thank you all for your thoughts and help, I’m glad to see so many of you are savvy with personal finance, it’s a skill that is desperately lacking in the general public…

 

[cnelk]

One thing that hasnt been discussed is doing a Recast on your mortgage.

Its a one-time Principal payment [typically large] that resets your mortgage with the same terms but lowers your payment.

So if you had extra cash and have a sweet low % rate it might be another option to consider.

 

[Elkhntr08]

Wife and I both retired with a mortgage at 3%. Making a 2k payment in a month is not an issue with my pension and SS and wife’s 401k. We’ve made the decision to pay the house off. With yesterday's payment, it fell below 60k. It’s valued at 800k. That’s a lot of equity we can fall back on if needed and freeing up the monthly payment will allow us to save of invest as we see fit. We have no other payments, I drive a 11 year old truck, she bought a used SUV last year. We travel a lot, she became a travel agent after retirement. I got a “part time” gig that pays very well. Everyone’s situation is different. You should find several advisors that you trust and listen, then make up your own mind what the best path for you is.

 

[Beendare]

We are fairly new to this situation after many years of low income and long hours but making plans to work with a qualified CPA (and maybe a CFP) is on the to do list in the near future. We live in rural WY so that limits our options quite a bit and we may need to go for something virtual/remote to find what we need.

I have never met my current CPA, we do everything remote...so thats not a factor. Just having a CPA do your taxes is worthless....but having them run the "What If" scenarios is solid gold.

Some of those good scenarios have been previously mentioned here by the many savvy dudes on Rokslide.....but when you do start making some serious dough, it gets more complicated and Tax managing things can have a huge effect long term.

Your state of WY has one of the lowest tax burdens in the US with no state income tax- so you are ahead of the game there. If you were in CA like Myself, you would be paying an additional 11-13% MINIMUM right off the top....so tax deductions are more important here.

You also have low property taxes in WY, so owning rental property is a slightly better tax advantaged investment.

General info on Side businesses; These are factored before the AMT tax schedules...where other deductions like Mortgage interest is fair game for the AMT. I think it kicks in for married folks making about $90k, not much these days. The AMT effectively limits the amount of deductions one can take. Make enough $$ and you can't write off the mortgage interest on your house. Thats simplified, It get complicated.

The key to evaluating a side business or any investment really is knowing your Effective income tax rate- what you are paying now. Businesses can take eligible expenses- that you currently pay for after tax- and move them to before tax. So let's say it's gas, home office, insurance, etc amounting to $10,000/year. $10,000 x 30%[your effective tax rate in this example] = $3000 a year you make with the business vs no business. Thats $30,000 in 10 years and if that invested it will probably be $60,000 to $100,000 in ten years, $500,000 in 20 years. Not exactly chump change.

 

[ODB]

One thing that hasnt been discussed is doing a Recast on your mortgage.

Its a one-time Principal payment [typically large] that resets your mortgage with the same terms but lowers your payment.

So if you had extra cash and have a sweet low % rate it might be another option to consider.

You missed my first post ;-). Although i used “restate” vs. recast. This is definitely one option we have considered as well. Lower the demand payment and maybe free up some cash for other uses. There are a lot of possibilities - kinda hard thought to definitively chose the perfect one due to all the variables and also personalities etc.

 

[mudslinger021485]

Super touch choice

 

[Idaboy]

With inflation where it is, and CD rates >4% or even 10 yr Tbill 4.25%, unless your mortgage rate is a newer higher rate, does not make sense. With standard deduction most of us can't claim/deduct mortgage interest for taxes, which was one prior incentive for carrying mortgage....with higher inflation you are basically paying back "in cheaper dollars". Also with high inflation investing in things that generally outpace inflation (eg the stock market) is better.....if interest rates drop and inflation drops too, then it may make sense.
Example: in current environment instead of putting 5K towards mortgage, invest in CD ladder that matures at 5yrs. Reassess at that time, you'd have more cash and then could pay even more of mortgage off in 5 yrs, than if you just did 1k/yr for 5yrs

Lots of online calculators that help run the numbers.

Yes the piece of mind of paying is likely priceless. But pending your situation, even low risk ( eg CDs instead of stocks) currently out pace your <4% mortgage rate

I feel for people trying to mortgage now with 6-7% rates....if you have one of those then I would pay down

 

[dreamingbig]

Don't have 100 grand lying around to make the 20% on a 500k starter home at 6.83% right now. Not many options theses days lol. You old guys have it made.

You could get a FHA loan at 96.5% or a HomePossible (Freddie) or HomeReady (Fannie) at 95%. Lots of options north of 80% for first time home buyers.


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[dreamingbig]

One thing that hasnt been discussed is doing a Recast on your mortgage.

Its a one-time Principal payment [typically large] that resets your mortgage with the same terms but lowers your payment.

So if you had extra cash and have a sweet low % rate it might be another option to consider.

The only benefit of a recast is that it lowers your minimum monthly payment.


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[cnelk]

The only benefit of a recast is that it lowers your minimum monthly payment.


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Only to invest the savings at a higher rate!