Does it ever make sense to pay off a home that you will not stay in forever?

[disneysteve]

a tax sheltered variable annuity 403b

This is a big pet peeve of anybody with half a brain's worth of knowledge about finance. It makes absolutely no sense to hold an annuity within a tax-sheltered account, but school districts, hospitals and other such places insist on doing it.

I'm honestly not sure how to evaluate if pouring money into such a plan is a good idea or if you are better off investing on your own. Since there is a tax savings to contributing, that probably makes it worthwhile since any other investing would happen with post-tax dollars.

[jIM_Ohio]

Thank you all so much.

I really need to decide if I want to max out my 403b or aggressively pay down my mortgage.

My Roth IRA will be maxed each year, and I the most that I am allowed to put in the 403b is $16,500 a year. So I need to decide what is smart...a tax sheltered variable annuity 403b - or paying down my mortgage.

I am saving about 30% of my income currently.

I want to add one reply in from another poster (feh)

I generally agree w/ Steve, although I suggest making higher payments on the principal such that the effective length of the loan is 15 years. It won't take that much per month, and a 15 year loan is so much more attractive than a 30.

You will want to add a third item to choices

1) more money to 403(b)
2) pay down mortgage
3) add to taxable investment accounts

1) and 2) are not liquid, and taxable investments are liquid. I want to remind you your risk with paying down the mortgage is liquidity, not whether the debt is bad thing or good thing or whether paying it off is a bad thing or good thing (most people here will agree paying off any debt is a good thing- in general).

As feh pointed out, paying on mortgage is best done with thoughts of a 15 year payment plan (and not 30) and if you remember the points Steve and I were making earlier... focus on how soon the mortgage would be paid off under following situations

1) if you maxed 403b to $16,500 (with Roth also maxed) when would mortgage be paid off?
2) if you contributed to 403b and Roth up to a 15% savings rate, and then split savings 50-50 between a cash account and mortgage payoff, when would mortgage get paid off?
3) If you contributed to 403b and Roth up to a 15% savings rate, then put all additional monies to mortgage, when would mortgage be paid off?


Feh's point is a good one, if you only put $50/mo extra to mortgage, you might shrink a 30 year note to a 29.5 year note or 28 year note. If you have a 15 year, you might knock 3-6 months of payments off the mortgage.

However if you were paying a higher amount to mortgage payoff, the savings is more dramatic. You can probably find a sweet spot somewhere between saving 50-50 like Steve suggested and aggressively paying off like Feh suggested.

IMO if choice was between tax shelter (30% savings rate all to retirement) and the ONLY alternative considered was mortgage payoff, then mortgage payoff gets about 10% of the savings rate (20% to retirement 10% to mortgage).

If Steve's choice of 50-50 was into play with a taxable account, I would change my vote...
20% to retirement, 5% to savings (IN A TAXABLE ACCOUNT), 5% to mortgage... with qualification I might do 4%-6% or 6%-4% or some variation adding to 10% if I see a specific time I want my mortgage paid off.

My emphasis is on having liquid assets to some degree, and the 30% all to retirement with a 30 year mortgage has too much money tied up into things which have restricted access.

Your primary risks in a situation like this are liquidity and inflation. If inflation is high, having debt is good (if we hit a period of high inflation you may choose to stop paying on mortgage because it looks so cheap). Liquidity means you are taking 30% of the money you earn and putting in in a place where you cannot really access it (like 403b or mortgage).

Balance those risks, add to a taxable investment account with a small portion of the money and use the rest to payoff the mortgage.

[cschin4]

I would accelerat paying it off. It is a guaranteed rate of return by prepaying. Also, if you do decide to move down the road, having your home already paid off might allow you the opportunity to buy another home and move prior to having to sell that one. For us, that is how it worked. When we decided to move, we simply bought the home we wanted and we got the home because we didn't have to buy on contigency of selling our other home. And, it gave us time to move, then get our old home ready and spruced up for selling. So, in that sense it gives you some opportunities that way. Also, it is just a great peace of mind thing.

[ScrimpAndSave]

This is a big pet peeve of anybody with half a brain's worth of knowledge about finance. It makes absolutely no sense to hold an annuity within a tax-sheltered account, but school districts, hospitals and other such places insist on doing it.

I'm honestly not sure how to evaluate if pouring money into such a plan is a good idea or if you are better off investing on your own. Since there is a tax savings to contributing, that probably makes it worthwhile since any other investing would happen with post-tax dollars.

Thanks Steve. I feel like $16,500 is an enormous amount of money to pour into an annuity...and I just have this overall feeling of...distrust? Like - why is this the only option offered to me by my school district?

Of course, I have a pension but I don't want to bank on it. I'm a music teacher and they are cutting programs left and right. I do have a masters in educational administration and a principal's certificate - but that doesn't give me ultimate job security. I want to have my own investments to rely on...and I think I would rather have my own mutual fund than the annuity...but I know you are saying that there are tax advantages to it.

My income this year is:
$60,000

What I am saving in 2010:
$5,000 - Roth
$4,500 - Paid toward pension
$10,000 -Extra savings that will be in tact at the end of the year


So there is a surplus after this...and I have an emergency fund that is fully funded. I was looking at either a personal mutual fund of my choosing, investing in the 403b tax sheltered annuity or paying off my mortgage early. And that is when I came to you all.

[zetta]

...but I don't know what life holds ahead of me and I am only 29

This line jumped out at me. Something like 80-90% of women marry by the time they are 45, so chances are high that you may meet someone and decide to move to a different place within the next 15 years. I would favor investing in an index mutual fund. If you change your mind a few years down the road, sell the fund and make a lump sum payment to the loan.

My answer would be different if you were more certain to remain in the condo forever.

[wincrasher]

Normally, I'd advise to pay down your mortgage before putting anything in a 403b.

Considering the situations with the schools right now, and for the next few years, you need to stay in investments that are liquid.

It's hard to put a price on peace-of-mind. A paid off home reduces you monthly minimum expense. Though not liquid, it's still a hard asset with value that can be tapped if needed. Eventually the real estate market will reach a steady state and you can expect some incrimental increase in value over the long term - the fundamentals of population growth demand it.

But there is also peace of mind in a very fat EF or savings portfolio. You also have alot of freedom to change your situation or say "no, I'm not accepting that" at your job.

So which is better? For you, I'd say since job situation and property markets are both volitile, go for max savings in liquid vehicles.

Good luck.

[snafu]

Having a goal and challenging yourself is great! Making payments that go directly to principal reduces the years of your loan. Run the numbers to see how much you'd need to contribute to reduce it by 5 years...for example. Does your lender provide the numbers detailing how your regular mortgage payments are distributed? The 1st 5 years are shocking!

Annuities are great for the agent selling the product but not such a good idea for a 29 y/o. If you haven't yet established a mutual fund, I suggest you make a start with DCA [dollar cost averaging] with Vanguard or similar fund with a wide range of products. As you become for comfortable and knowledgeable, sums in an Index Fund or Dividend Fund could be transferred to products with higher risk and higher return potential. As already stated, those monies are totally liquid in two business days...should the need arise.

We're all sad to see education programs being torn to shreds when an educated population is what distinguishes the USA and allows it to be innovative.

[segmond]

does it EVER make sense?
depends, when REO houses are on fire sale from the bank and no one is lending. YUP!

[cptacek]

I like option 3 from Jim's post. Invest the money in a taxable account, and then when you get enough to pay off the house, you have the option to do that, or you can just keep it in the investment account.

[jIM_Ohio]

Thanks Steve. I feel like $16,500 is an enormous amount of money to pour into an annuity...and I just have this overall feeling of...distrust? Like - why is this the only option offered to me by my school district?

Of course, I have a pension but I don't want to bank on it. I'm a music teacher and they are cutting programs left and right. I do have a masters in educational administration and a principal's certificate - but that doesn't give me ultimate job security. I want to have my own investments to rely on...and I think I would rather have my own mutual fund than the annuity...but I know you are saying that there are tax advantages to it.

My income this year is:
$60,000

What I am saving in 2010:
$5,000 - Roth
$4,500 - Paid toward pension
$10,000 -Extra savings that will be in tact at the end of the year


So there is a surplus after this...and I have an emergency fund that is fully funded. I was looking at either a personal mutual fund of my choosing, investing in the 403b tax sheltered annuity or paying off my mortgage early. And that is when I came to you all.

This post is quite telling... you want liquidity. If employment is at risk, its better to have debt and some liquidity than no liquidity or no debt.

If you have high liquidity and no debt, that is your best case situation... but before you reach that situation, the risk of liquid assets is your biggest risk.

If you put most of extra savings into mortgage paydown, think of this "worst case situation"

1) You have abvout 300-500k in a 403b annuity. Don't know rules for accessing this, but guessing you would pay
a) surrender charges on annuity
b) 10% early withdraw penalty
c) taxes on withdraw/distribution at current tax rates

2) You would have about 100-150k equity in condo, with no income to borrow against. Borrowing to tap the equity would be at mercy of banks

3) Low savings in taxable accounts

the opposite of above worst case could be
1) 300-500k in 403b annuity
2) 25-75k equity in condo
3) moderate taxable investments (probably 60-200k)

[Goldy1]

We'll have our mortgage paid off in a couple years. My dh bought the house for 150K in 1997 at the age of 24. We may have put approx. 40K or so into improvements. Having no kids until last year and both working helped u put a lot of extra on it.

It is very sweet to think of no house payment, but like we talked about here unfortunately only one pice of the finanicial peace pie. It's a pretty nice size chunk though.