I am 33 years old. I make roughly $60k gross per year and have had a steady career job for 11 years. I recently refinanced my mortgage ($161,000 @ 3.75%) and positioned myself to make double payments (additional $1000) in order to pay it off in under 10 years. I am looking to move out and make it an investment property in coming years. All of my other loans and credit cards have been paid off. I have approximately $10k in savings currently. I am paying in the maximum employer match of 6% into my 401k. I have no other investments. After tons of research, I have not found any clear answers.
I am wondering if I should pay off my mortgage early with my expendable income or look into investments beyond my 401k?
Great question. I think the reason you haven’t found a clear answer is there isn’t really a clear answer. You are in a great position where you have income above your costs and are able to funnel additional money into different areas. You really can’t make a bad decision here, but I think the better answer is to increase your investments.
I generally recommend people save 10-20% of income for retirement. This includes any company 401k match. I recommend people invest in this order, 1) 401k contribution required to get full company match, 2) max a Roth or Traditional IRA, 3) max 401k contribution and 4) after-tax investments.
Some quick math, you’re making $60k, contributing 15% of your income would be $9k a year. You have ~32 years until you reach 65. If you invested $9k a year at a 7% annualized rate for 32 years, you’d have ~$1 million. I generally recommend a withdrawal rate under 5% in retirement, so that would give you ~$50k/year - almost fully replacing your current income. This doesn’t assume future income increases, which would increase your projected balance.
Since your mortgage interest rate is so low, you aren’t saving that much in interest by paying it quicker. If you pay the minimum payment, you’ll pay ~$107k in interest over 30 years. If you pay $1,000 additional principal a month, you’ll pay it off in between 9-10 years and pay $30k in total interest. That $77k saving is real money, but is less than you could make investing.
The way I would make this decision is to do what you’re most comfortable with. Maybe investing more and paying a little extra on the mortgage makes sense. The math would tell you borrowing at 3.75% and investing at 6-8% a year is a good decision, but there is also value to debt repayment. Hope this helps you think through the issues and let me know if you have additional questions.
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I’m wondering how long you’re planning to live in the home? If this is your dream home that you plan on living in for the rest of your life then paying it off early is not a huge win considering you have a low 3.75% rate. Adding an additional payment or looking into bi-weekly mortgage payments could be a good option to pay off the mortgage faster while still giving you extra money to invest.
If you’re planning on using it as a rental property at some point then paying the mortgage down faster could be a great idea so you are cash flow positive when you rent it out.
Otherwise, investing money into your tax-deferred 401K can be a good option to get growth over the next 10 years. You could also take advantage of a Roth IRA to build up a tax-free bucket of retirement income.
Consider that if you pay off the home early you would have all your equity locked up in the home. You would have to borrow against that home to get that cash out. With investments like a Roth IRA you can pull your contributions out at any point and avoid penalties and taxes because your contributions are made with after tax dollars.
My inclination is to keep making your extra payments but look into opening a Roth IRA for the excess money you have to invest.
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