Shoud I pay down my mortgage

[nick__45]

Household Incom: $105k
2010 Interest paid: $8700
Property tax: ~$2000
Last year school fee ~$1800
1 dependent
Married filed jointly

Current interest rate 4.99%

I like to put $50k toward the mortgage becuase I don't think I get that much benefit from mortgage interest rate tax deduction and I don't have that much, if any, itemized item. There are 3 people in the household on one income.

2011 school fee should be $5-7k. Mortgage Interest should be about $8k. I am only less than 2 years into my 30 years fixed rate of 4.99%. Should I pay down my mortage by $50k that I saved up and probably take the standard deduction? Or should I stick with that fact that I have college tuition to deduct and use the itemized 1040A schedule while still having school fee for the next 1.5-2 years and than pay as much down as possible ($70k) to reduce my mortgage term in half? I am only 28 and don't know jack about mortage or taxes. And I earn about .95% on my money because I refuse my put it in any stock or bond that can be wiped out by some greedy speculation.

401k is maxed but I stopped doing IRA because I don't want money tied up to places/corporation that I can't touch until retirement age, which the gov't can raise any any time. It is bad enough I have to pay SS, I don't need any scam. Of course, I don't believe in stock outside of my goven't sponsor 401k.

Any advice would be greatly appreciated. Sorry for the long winded and horrible grammar. I've been working 70 hrs a week in the sun last week and will be pulling the same hours this week. Tired and can't sleep.

[snafu]

I suggest you split your savings into several chunks. 1st chunk in Money Market Fund/Savings Emergency Fund to cover 3-6 months expenses depending on how secure you feel with employment. 2nd chunk into retirement plan, particularly if there is any matching by employer. Since you won't discuss Bonds or Equity/Stock, how do you feel about laddered Certificates of Deposit [CDs]. 1 year, 2 yr., 3 yr, 4 yr, 5 yr. Each year you rollover the certificate that has expired so they are in constant rotation. These can be cashed out anytime but look for one that charges a smaller penalty.

About 93% of your mortgage payment is interest in the 1st five years. It takes about 15 years to get to 50 - 50 split between interest and principal on a traditional mortgage. It is often recommended that you pay $200. extra each month on the principal...depending on the specific terms of your mortgage.
Mortgage Calculator - Bloomberg

We doubled up on our Mortgage payments and that resulted in paying off a 30 year mortgage in 12.2 years. Remember you still will be paying property/municipal tax. The savings were spectacular when we ran the figures. We have always used the original mortgage payment sum to make monthly investments in a low cost Dividend Mutual Fund which is not part of our retirement savings.

[BuckyBadger]

Originally Posted by nick__45

401k is maxed but I stopped doing IRA because I don't want money tied up to places/corporation that I can't touch until retirement age, which the gov't can raise any any time. It is bad enough I have to pay SS, I don't need any scam. Of course, I don't believe in stock outside of my goven't sponsor 401k.

As far as I know, you can take out your IRA contributions at any time you want with no penalty (except that you penalize yourself because you've lost that contribution amount). It is only the interest earned on your contribution that you can't touch.

So you may want to rethink your IRA decision. Most retirement advisers prefer the IRA over the 401k and say that if you can't max them both out, you should contribute to the 401k up to your company match, then max out an IRA, then go back to 401k contributions.

[couchrobt]

Yes of course, it just follows that when you applied for it, you should pay for it. Why not if you can really afford it.

[BuckyBadger]

What is the balance on your mortgage? How big a chunk of it would $50k be? What is your EF at?


There may be better/safer ways to apply that money to your mortgage. Unless you were planning on refinancing after paying $50k to it, you'll still be tied into the same payment, and you'll still be paying interest, but you'll have $50k that you now can not get to easily in case something terrible happens in your life.


But now that I have reread your OP, I'm a little confused. Am I reading that correctly? You're earning less than a percent on your money because you don't trust stocks? The only "stocks" you are in are those that your 401k are in?

[disneysteve]

Originally Posted by nick__45

Household Incom: $105k
Current interest rate 4.99%

I like to put $50k toward the mortgage becuase I don't think I get that much benefit from mortgage interest rate tax deduction

Whether or not to prepay the mortgage really has nothing to do with the interest deduction. The deduction amounts to you paying $1.00 in order to save $0.25. It still leaves you in the hole for $0.75. So you lose every time.

The things you should be looking at are:

Do you have a 6-month emergency fund in place?
Are you debt-free besides the mortgage?
Are you saving 15% for retirement?
Are you saving at least 5% for other needs (next car, vacations, home improvement, etc.)?

If you have all of your financial needs taken care of and still have extra money each month, prepaying the mortgage is not unreasonable. We are currently doing that ourselves and hope to have the house paid off in about 7 years.

[Petunia 100]

<< As far as I know, you can take out your IRA contributions at any time you want with no penalty (except that you penalize yourself because you've lost that contribution amount). It is only the interest earned on your contribution that you can't touch. >>

That is true for Roth IRAs, but not traditional IRAs.

[Petunia 100]

<< 401k is maxed but I stopped doing IRA because I don't want money tied up to places/corporation that I can't touch until retirement age, which the gov't can raise any any time. It is bad enough I have to pay SS, I don't need any scam. Of course, I don't believe in stock outside of my goven't sponsor 401k. >>

If you're unwilling to do anything other than hold cash or prepay your mortgage, then prepay your mortgage. Be certain you hang onto enough cash to serve as an EF and cover looming expenses (vehicle replacement, appliance replacement, vacations, etc.)

[nick__45]

OP here...I maxed out my 401k which is in a much more secured investment vehicle than the typical stocks that can leave people penny-less. I don't have to worry about retirement because it is 20% of my salary with another 5% matching fund.

I had some Roth IRA when I first started working, even maxing out that for my wife. But seeing how the money is tied up and can only be withdrawn for college (which I have money saved up already) and death in the family (which I also have saved up already.) This $50k came from the fact that I bought a much cheaper house than what I originally set out to buy. My original purchase date plan was back in 2006 but I couldn't afford anything in a good neighborhood. In 2006, everything listed sold quickly and being a paranoid person, I didn't want to buy into any neighborhood so I kept saving and saving. Well, I bought a house in the neighborhood I wanted late 2009 and got $8k as well. Even after 20% down, I still had a lot left because the house is less than half of what it would cost in 2006. Maybe I should have put down more than 20% but I wanted to wait till I get tenure with my job and I got that last year. Therefore, my job is untouchable as long as I don't do something seriously stupid.

Since I do have itemized deduction such as student fee, I am debating whether to keep paying the interest on the mortgage until school is finished in 1.5 years. My money originally was kept in CD with 4% interest but all that went down hill when they matured right before I bought the house. So now the interest rate is crap.

Current mortgage balance is $163k. If I pay $50k, I can pay it off in 10 years at the current monthly payment amount. And no, I won't need to refinance since it is a very silly thing to do. Interest would need to be 3% for me to refin and I don't need to money or be in more debt longer.

By the way, I have zero CC debt. I am not frugal any any standard but I believe in making money and spend it to keept it happy. It happens that I don't need to spend as much as other people.

[mcfroggin]

Originally Posted by disneysteve

Whether or not to prepay the mortgage really has nothing to do with the interest deduction. The deduction amounts to you paying $1.00 in order to save $0.25. It still leaves you in the hole for $0.75. So you lose every time.

The things you should be looking at are:

Do you have a 6-month emergency fund in place?
Are you debt-free besides the mortgage?
Are you saving 15% for retirement?
Are you saving at least 5% for other needs (next car, vacations, home improvement, etc.)?

If you have all of your financial needs taken care of and still have extra money each month, prepaying the mortgage is not unreasonable. We are currently doing that ourselves and hope to have the house paid off in about 7 years.

Excellent advise assuming the OP absolutely won't invest in stocks, home business, etc.

[disneysteve]

Originally Posted by nick__45

typical stocks that can leave people penny-less.

I really wonder where you came up with that notion. Hardly ever does a stock drop to zero. Yes it has happened a couple of times over the years - Enron comes to mind - but generally stocks do just fine over time. Even if you did happen to have a stake in a company that totally imploded, assuming you were well-diversified with no more than 5% of your portfolio in any single company, it would almost be a non-event for your portfolio.

Buy a total stock market index fund and you own thousands of companies at once. Even if several of them went bankrupt at the same time, it would barely be a blip on the performance chart.

[nick__45]

Originally Posted by disneysteve

I really wonder where you came up with that notion. Hardly ever does a stock drop to zero. Yes it has happened a couple of times over the years - Enron comes to mind - but generally stocks do just fine over time. Even if you did happen to have a stake in a company that totally imploded, assuming you were well-diversified with no more than 5% of your portfolio in any single company, it would almost be a non-event for your portfolio.

Buy a total stock market index fund and you own thousands of companies at once. Even if several of them went bankrupt at the same time, it would barely be a blip on the performance chart.

My 401k index fund lost 37% 2 or 3 years ago. I only check the annual return as I am in it for a loung haul. WHile it did have double digit gain for the 2 or 3 years after, I am still behind. Overall, that fund has close to 10% return since inception but those big negative return can mean having to keep the fund in 3-7 years longer before withdraw. Since I still have more than 20 years until retirement, I don't want to keep it in a fund that guarantee a positive return but only have an average of 5% the past 10 years and about the same return since inception in the 80s. Beside 401k, I plan to never keep money in stock. Stock values fluatuate without much logical reasons often and in order for someone to make money, someone else has to loose. The only fund worth keeping money in in the long haul is the S&P 500 for me. The good and sure investment is land and good health.

[disneysteve]

Originally Posted by nick__45

in order for someone to make money, someone else has to loose.

Why? If I buy a stock at $10/share and sell it for $15/share at which point you buy it for $15/share and sell it for $20/share, who lost money? And, of course, in order for the stock price to climb like that, the company has to be doing well and making money. Who is the loser in that situation?

[LivingAlmostLarge]

Have you looked if you are up since 37% loss? I am and I'm pretty sure most people are as well.

[BuckyBadger]

When checking accounts give you 11% interest you'll be fine I suppose. But target date mutual funds would take care of all your concerns and probably make you way more money in the long run.

[snafu]

Nick, try to keep your eye on the big picture. You care about your money more than anyone else cares about your money so you need to learn more and more about money, stock market, bond market and savings. You have a low interest rate on your mortgage and also get a ghastly rate on savings since a 4 point spread is the low between lender and borrower. The more you understand what you are buying in a Mutual Fund the better decision you can make.

There is a link between making a profit on investments and level of risk. The USA is the biggest market in the world and you can learn about the different companies if you want. The Singapore market for example is small with very stringent rules and you are more likely to increase value with smaller risk on stocks. Problem is there are relatively fewer stocks/bond and the value of the Singapore dollar to the American dollar some distant time in the future.

China's economy has been growing at about 9% per year but truth is not a factor in China and corruption runs mostly uncontrolled, exactly opposite to the system in Singapore. It's understandable since they have 5000 years of needing to tell what others want to hear in order to survive. A contract in China is not worth the paper it's written on which drives Western companies mad with frustration.