An IRA is really nothing more than an account that defers or avoids the taxes in some manner, be it traditional IRA or Roth IRA.
The investment choices held within the account can be as conservative or aggressive as one wishes.
Investing
- Thread starter jaxbusa
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The investment choices held within the account can be as conservative or aggressive as one wishes.
I am sitting in a similar situation, whether to invest a good chunk of money or pay off the mortgage. At this point I'm heavily leaning towards paying off the mortgage for a few reasons:
A. The current tax code is on shaky ground. If the standard deduction is increased, there is zero benefit to deduct my interest.
B. The avg whole market return is roughly 10% over the LONG TERM. That's 20+ years in the market. I'm not sure how the markets are going to react to the Fed's decisions to decrease securities purchases. This could reduce the incentive for investment in equities/stocks and devalue the market in the next 12 to 24 months creating a buyers market then and not now AND has the potential to devalue any stocks you may buy right now with that cash.
C. I really don't like the idea of paying 4% interest on a large asset if I do not have to over 30 years. You are paying hundreds of thousands of dollars in interest over that time. Granted inflation will cause that to be less and less of an impact if you do continue to pay, BUT not having a mortgage makes you far more agile to make future life decisions.
that's my $.02
A. The current tax code is on shaky ground. If the standard deduction is increased, there is zero benefit to deduct my interest.
B. The avg whole market return is roughly 10% over the LONG TERM. That's 20+ years in the market. I'm not sure how the markets are going to react to the Fed's decisions to decrease securities purchases. This could reduce the incentive for investment in equities/stocks and devalue the market in the next 12 to 24 months creating a buyers market then and not now AND has the potential to devalue any stocks you may buy right now with that cash.
C. I really don't like the idea of paying 4% interest on a large asset if I do not have to over 30 years. You are paying hundreds of thousands of dollars in interest over that time. Granted inflation will cause that to be less and less of an impact if you do continue to pay, BUT not having a mortgage makes you far more agile to make future life decisions.
that's my $.02
Traditional avoids taxes up front, ROTH avoids taxes on the back end. I'm sure you know, but just an FYI out there for the differences.
Using a mortgage calculator, I compared the route I’m on with a 30 year mortgage versus putting the money down and refinancing for 15 years. Because I don’t know what interest rate I would get at 15 years, I kept the same 4.2.
I will pay $171,104 just in interest in a 30 year mortgage.
I will pay $43,694 just in interest in a 15 year with the extra money down.
I use a 15 year because it keeps my monthly payment about the same.
The difference in in interest is $127,410.
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I will pay $171,104 just in interest in a 30 year mortgage.
I will pay $43,694 just in interest in a 15 year with the extra money down.
I use a 15 year because it keeps my monthly payment about the same.
The difference in in interest is $127,410.
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you should be able to get a 15yr for about 3.5% with minimal closing cost, which you can roll in the loan. That would be a no brainer to me. On top of that, you would STILL have money to invest in your 401k etc. In other words, refinance for the 15yr, but don't use that extra money towards the principal. Use it for stock/IRA/401/land.
I couldn’t afford the payment of a 15 year unless I put the money toward it.
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Id pay off the house. Do you honestly think the post election returns are sustainable? Especially when they start bumping interest rates, which they have. Add to that the fed drawing down its balance sheet. That's a lot of capital coming out of the investment world. Don't fight the FED on the way down, but ignore it on the way up? Over the last several days I have moved my IRAS towards cash, holding some banking and oil mostly. Return on that cash is basically zero, and I'm ok with that. If I could pull out a chunk and pay off the house, then pay myself back over time with interest, I would do that. You have effectively that choice available to you right now.
ok, so then keep the 30. Then if you want, every month you can add an extra principle, say 100-$200.
I just bought my first house on a 30 year @ 4.0%.
I don't quite have the bandwidth yet to pay at a 15 year rate without eating into my budget each month so I make 13 principal payments per year by paying 1/12th of a normal principal amount on top of each month. This puts my payoff somewhere around the 25 year mark.
I don't quite have the bandwidth yet to pay at a 15 year rate without eating into my budget each month so I make 13 principal payments per year by paying 1/12th of a normal principal amount on top of each month. This puts my payoff somewhere around the 25 year mark.
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ALWAYS invest if your earned interest is higher than your borrowed interest.
Example:
$200,000 Mortgage over 30 years at 4.5% with a $1,013 monthly payment = $364,813 total or $164,813 in interest paid over 30 years.
$200,000 mortgage over 15 years at 3.5% with a $1,430 monthly payment = $257,358 total or $57,358 in interest paid over 15 years.
Keep the 30 year mortgage and invest the $417 every month that you would have paid extra to have a 15 year mortgage... $417 x 12 months = $5,004 per year invested.
- Starting with $417 at 9% return you will have $161,664 after 15 years, and after 30 years this will be $749,003.
If you do the 15 year mortgage and wait until it's paid off to start investing... $1,430 x 12 months = $17,160 per year invested.
- Starting with $1,430 at 9% return you will have $554,387 after 15 years.
- Even if you add the $107,455 extra paid in interest on the 30 year mortgage your net savings would only be $661,842 which is $87,161 less than investing $417 per month while staying with the 30 year mortgage.
Example:
$200,000 Mortgage over 30 years at 4.5% with a $1,013 monthly payment = $364,813 total or $164,813 in interest paid over 30 years.
$200,000 mortgage over 15 years at 3.5% with a $1,430 monthly payment = $257,358 total or $57,358 in interest paid over 15 years.
Keep the 30 year mortgage and invest the $417 every month that you would have paid extra to have a 15 year mortgage... $417 x 12 months = $5,004 per year invested.
- Starting with $417 at 9% return you will have $161,664 after 15 years, and after 30 years this will be $749,003.
If you do the 15 year mortgage and wait until it's paid off to start investing... $1,430 x 12 months = $17,160 per year invested.
- Starting with $1,430 at 9% return you will have $554,387 after 15 years.
- Even if you add the $107,455 extra paid in interest on the 30 year mortgage your net savings would only be $661,842 which is $87,161 less than investing $417 per month while staying with the 30 year mortgage.
I’ve searched around and I still get different answers from smart people that I trust. I know the numbers tell me to invest, but it’s hard to take the emotion away from the money. I understand investing now sets me up much better for the future. If I did pay off my house earlier in life I imagine it might be hard for me to save. I might think that my biggest financial burden is gone and start blowing my pay checks and rely on my retirement. If I invest now I will be forced to pay my mortgage and the temptation to be financially lazy won’t be there. I also understand that I am locked into this mortgage payment and it will be easier later on because of inflation and my wife and I will most likely have higher incomes. Thanks everyone. I appreciated reading everyone’s input.
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Just look at the numbers like you said. Your mortgage is 4% and the average return is 7%. Would be a smart idea to invest. Good luck with whatever you choose.
Few good books if you want to read on investing and money management.
Total Money Makeover(Most people know this one, I started my makeover almost 2 years ago. I'm now totally debt free other than a 15 yr and invest roughly 25% of my income. Sometimes more if I receive bonuses)
The Millionaire Next Door (this is another obvious but fairly motivating book)
A Random Walk. This one was written by a princeton professor. He advocates using index funds as the majority of professional investors are unable to beat the index continuously and index funds allow you to minimize fees paid to brokers and minimize realized gains. Honestly if you are just looking for investment advice for the casual investor this is probably the way to go. Although I do not totally agree with the efficient market(Warren Buffet made his fortune off inefficiencies in the market) index funds and the plans laid out in this book are not a bad strategy for those who do not wish to be heavily involved in their investments.
Obviously the intelligent investor. The value investors bible written by Ben Graham Warren Buffets mentor.
Screw paying someone to manage your investments. it's not that hard to do and can be quite rewarding following a little research. Also day trading and speculating rarely work out for investors. Either invest in a broad portfolio of index's and bonds or spend the time to make informed value decisions on investments. And yes I would invest the money. Financially it makes the best sense.
Total Money Makeover(Most people know this one, I started my makeover almost 2 years ago. I'm now totally debt free other than a 15 yr and invest roughly 25% of my income. Sometimes more if I receive bonuses)
The Millionaire Next Door (this is another obvious but fairly motivating book)
A Random Walk. This one was written by a princeton professor. He advocates using index funds as the majority of professional investors are unable to beat the index continuously and index funds allow you to minimize fees paid to brokers and minimize realized gains. Honestly if you are just looking for investment advice for the casual investor this is probably the way to go. Although I do not totally agree with the efficient market(Warren Buffet made his fortune off inefficiencies in the market) index funds and the plans laid out in this book are not a bad strategy for those who do not wish to be heavily involved in their investments.
Obviously the intelligent investor. The value investors bible written by Ben Graham Warren Buffets mentor.
Screw paying someone to manage your investments. it's not that hard to do and can be quite rewarding following a little research. Also day trading and speculating rarely work out for investors. Either invest in a broad portfolio of index's and bonds or spend the time to make informed value decisions on investments. And yes I would invest the money. Financially it makes the best sense.
There are two assumptions made in your response. One is a given and the other is potential. We know without a doubt that he owes 4% on his mortgage for the next 30 years or so. HISTORICALLY we know the market will yield 7 to 10%. We don't know that for sure in the future and how long it will take to yield that return per year in average. Also, there is a lot of uncertainty out there from many different drivers. When it seems like the best time to invest (markets have record returns) is probably the worst time to invest (buying high).
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