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

[Ucsdryder]

I’m

I wish I would have had the confidence to have done what I thought I should have done when I was 20.

Also, I am really not that smart. Just really opinionated on certain topics.

you just described 90% of rokslide.

 

[CorbLand]

I’m

you just described 90% of rokslide.

You saying I am part of the cool kids club now?

Finally, I made it.

 

[Jhconnected]

Theoretically, if you had 100k cash and owed a 100k on your mortgage, then paid it off. You would be in a much tougher spot than if you didn't pay it off. You now have no money left liquid, if your layoff is an extended one. If you compare to investing in safe liquid funds, (hysa, short term tbills) you now have 100k in accounts in which you can ride out your layoff ( hopefully) and make minimum monthly mortgage payments, all while leaving the bulk of you liquid cash invested at a higher rate.

Yeah, emergency fund is pretty clutch.

I also do “sinking funds” as well.

 

[ODB]

I’m

you just described 90% of rokslide.

Yes. Not always right, but never in doubt!! ;-)

 

[texag10]

30 year mortgage, $320k at 3% interest is $165,688 paid in interest. So a $400k house with 20% down.
6% interest in the same mortgage would be $370,682 in interest paid on the life of the loan.

Many comments about not willing to pay extra at a rate like that, it's like free money. What's almost free about repaying 150% to well over 200% of the borrowed amount?

Why do I care that I paid more interest if I also have more money overall?

It's not a zero sum game.

 

[ztc92]

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).

 

[180ls1]

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).

Knowing "no solutions, only tradeoffs" and your interest % + wifes preferences this is a little harder than the brass balls guys on here with 3% loans.

That said, tax liability is a liability and given that you're in your 30's with a 60 year horizon on the portfolio + TCJA lowered tax rates tremendously. I think you would be well served to at least put some in ROTH.

100% of my retirement savings are going there right now. When I am 40 or the TCJA expires I'll likely switch.

 

[ztc92]

Knowing "no solutions, only tradeoffs" and your interest % + wifes preferences this is a little harder than the brass balls guys on here with 3% loans.

That said, tax liability is a liability and given that you're in your 30's with a 60 year horizon on the portfolio + TCJA lowered tax rates tremendously. I think you would be well served to at least put some in ROTH.

100% of my retirement savings are going there right now. When I am 40 or the TCJA expires I'll likely switch.

Thank you for your thoughts. Want to make sure I understand your suggestion. Basically, we have (relatively) low taxes right now thanks to the TCJA but this may expire soon and since it is unclear what my tax liability could be in the future, you suggest putting money in Roth now to avoid potentially higher taxes in the future. Is that right?

I also appreciate the lack of mandatory distributions with a Roth, which won’t be the case with our 403B’s.

 

[Tahoe1305]

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).

I’d save enough to be ready to refinance if you can get a 5.5% or lower rate in the near future as well. Don’t take cash out, just pay the fees with cash and potentially pay down a little there for the option of an even lower payment.

 

[Jhconnected]

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).

I would do the math. But, the earlier you save the more your money will work for you. (YUUUUUUGE!) Having an extra 10+ years of compounded interest can work miracles. Look at the historical returns S&P 500 Index funds like SPY or VOO get over 10+ years.

I use bankrate.com calculators to estimate such possible outcomes.

Typical rule of thumb is to save 15% of your income for retirement between retirement plans 410k/403b and IRAs and other methods.

Your situation may allow for 15% savings or just maxing out any company retirement match and backdoor Roth with the rest going to pay down the mortgage. But, that’s for you and your wife to decide.

My gut reaction is hating debt but I usually end up pushing past that and following the math. The exception for me is high interest debt (credit cards).

If you’re deciding between backdoor Roth or traditional Roth it kind of depends on what you think you’ll be paying in taxes in retirement but I prefer Roth. Especially when you’re younger and you may be in a lower tax bracket now with the ability to grow the fund tax free. It is more likely (but not guaranteed) you’ll pay less tax now than if you had it all in tax deferred accounts like traditional IRAs. I don’t have a crystal ball so I’m predicting out of my ass for my own situation.

But not sure id listen to me. I’m just some dude on the internets and not a financial advisor.

 

[williaada]

I would suggest using the following. At work use a ROTH and then convert the employer match into a Roth as well. If there is money leftover do the back door Roth. The difference between the two seems minor now, but when there is a sizable amount of money the difference is much larger.
401k $1 million take home is $750k
Roth $1 million take home is $1 million
Assuming a 25% tax bracket

 

[Pickettpuncher]

Theoretically, if you had 100k cash and owed a 100k on your mortgage, then paid it off. You would be in a much tougher spot if you got layed off and just payed off your mortgage vs. If you didnt pay off your mortgage and invested the money. You now have no money left liquid, if your layoff is an extended one. If you compare to investing in safe liquid funds, (hysa, short term tbills) you now have 100k in accounts in which you can ride out your layoff ( hopefully) and make minimum monthly mortgage payments, all while leaving the bulk of you liquid cash invested at a higher rate.

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.

 

[Rich M]

Just tagging on here.

1. Max out your retirement, HSA, kid's college, etc. contributions before you pay extra on the house. If you pay off your house early, you removed $X$ from the compound interest growth over 20-30-40 years. That's where it hurts.

2. Just save - research the 401K vs Roth. There are advantages to each. Anyone who says no advantage to 401K is fooling themselves. Don't get too caught up, the govt didn't make it so you can really max out doing Roth - the advantage is that there are no required withdrawals and it is easier to pass to heirs.

There are limits to what you can invest in both - makes it easier to do the math yourself. I did the math and it didn't make much diff - we use 401K to stay in a lower tax bracket.

3. All things being equal, retirement is about how much you accumulate and how many "passive" income streams you can generate. If you spend all your money paying off stuff, you aren't investing any of it.

4. There are advantages to being debt-free too, if you so choose. I lean to the savings side. If got laid off, could pay my monthly obligations for years to come. Could also pay off my debts and still have $ left on the table.

 

[Rich M]

I would suggest using the following. At work use a ROTH and then convert the employer match into a Roth as well. If there is money leftover do the back door Roth. The difference between the two seems minor now, but when there is a sizable amount of money the difference is much larger.
401k $1 million take home is $750k
Roth $1 million take home is $1 million
Assuming a 25% tax bracket

Don't forget that you had to make $1.35 million to invest $1 million in Roth with 25% tax backet. (1.35 mil x .75 = 1.012 mil)

You saved at least $0.25 million ($250k) in taxes by doing pre-tax with 401K. Could put that into a Roth IRA to offset the diff.

Sorry - I'm in the final push for retirement and doing all the math & stuff. Didn't see a big monetary diff between 401K and Roth. It was the required min. dist. and transferring $ to heirs thing that jumped out to me.

I know some folks who say their retirement fund is their house. Not having to pay rent or mortgage is one thing but we still have insurance and taxes. In my mortgage, the taxes and insurance make up a big chunk.

 

[Jamie930]

As others have said paying the house is emotional but knowing all you have to pay is taxes to keep a roof over your head is comforting.
After the house is paid you could start to invest that monthly nut

 

[texag10]

Just tagging on here.

1. Max out your retirement, HSA, kid's college, etc. contributions before you pay extra on the house. If you pay off your house early, you removed $X$ from the compound interest growth over 20-30-40 years. That's where it hurts.

2. Just save - research the 401K vs Roth. There are advantages to each. Anyone who says no advantage to 401K is fooling themselves. Don't get too caught up, the govt didn't make it so you can really max out doing Roth - the advantage is that there are no required withdrawals and it is easier to pass to heirs.

There are limits to what you can invest in both - makes it easier to do the math yourself. I did the math and it didn't make much diff - we use 401K to stay in a lower tax bracket.

3. All things being equal, retirement is about how much you accumulate and how many "passive" income streams you can generate. If you spend all your money paying off stuff, you aren't investing any of it.

4. There are advantages to being debt-free too, if you so choose. I lean to the savings side. If got laid off, could pay my monthly obligations for years to come. Could also pay off my debts and still have $ left on the table.

More and more 401k plans are allowing Roth contributions, so no income limits and much higher contribution limits. I suspect almost all plans will allow Roth soon, because part of the SECURE Act 2.0 requires people above a certain income level do make any catch up contributions as Roth money.

 

[Jhconnected]

Don't forget that you had to make $1.35 million to invest $1 million in Roth with 25% tax backet. (1.35 mil x .75 = 1.012 mil)

You saved at least $0.25 million ($250k) in taxes by doing pre-tax with 401K. Could put that into a Roth IRA to offset the diff.

Sorry - I'm in the final push for retirement and doing all the math & stuff. Didn't see a big monetary diff between 401K and Roth. It was the required min. dist. and transferring $ to heirs thing that jumped out to me.

I know some folks who say their retirement fund is their house. Not having to pay rent or mortgage is one thing but we still have insurance and taxes. In my mortgage, the taxes and insurance make up a big chunk.

The downside to traditional 401k is that you have to pay taxes on the investment and growth when you remove it.

They say to go Roth 401k if you think you’ll pay more taxes later.

Flip a coin on that one.

 

[HuntHarder]

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.

No doubt.

 

[cowdisciple]

The downside to traditional 401k is that you have to pay taxes on the investment and growth when you remove it.

They say to go Roth 401k if you think you’ll pay more taxes later.

Flip a coin on that one.

Yeah, advantages and disadvantages.

Most people will have a lower tax rate in retirement than they do while in their prime earning years (since if you're retired your earned income is generally much lower)

However, contributing to a Roth has the functional effect of allowing a higher contribution limit, since you're saving after tax dollars and they're worth more.

I think it makes some sense to have at least some savings in pre-tax traditional 401k, since then you can convert it to Roth and take the tax hit at a time of your choosing, whenever you expect to have some extra space until the next tax bracket.

Again, this is really all chasing pretty small marginal edges. While long range financial planning makes those small edges somewhat important and they do add up, savings rate is still much, much more important than whether you choose Roth or traditional.

 

[HuntHarder]

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)