Pay Extra on Mortgage or Fully Fund Roth IRA

[skives]

My wife and I are trying to decide between paying extra on our mortgage going from $900 a month to $1,322 a month or fully funding a Roth IRA account. We both currently put 15% into our roth 401k's. We make about 72k-75k a year combined. Which do you guys think we should do? The difference on the mortgage is at $900 a month it will be paid off in just under 13 years and and at $1,322 just under 8 years.

[disneysteve]

What’s the interest rate on the mortgage?

Keep in mind it doesn’t have to be an either or answer. You have $422/month free. You could put most in a Roth and maybe $100 toward the mortgage, for example.

Personally I would prioritize retirement. You’ll likely earn more in the Roth than you’ll save on the mortgage. Plus if you ever really wanted to, you could pull some money out later and pay off the mortgage.

[skives]

Rate on mortgage is 3.625%

[sblatner]

First, how old are you? If older, I say fund your Roth. The amount you can put in a Roth each year is limited so you can't pay off your mortgage and then put more than the max in your Roth later. I guess the max on the Roth might go up each year but not by that much. Like disneysteve said, it also doesn't have to be an all or nothing approach.

I'm 53 and wish we had started our Roths when they first came out.

[Jluke]

Why a Roth 401K? Just curious

In your case I would put the extra towards retirement.

Low mortgage rate, 13Y vs 8Y. I’ll guess you are not paying much in interest at this point of the amortization schedule. Doesnt seem to make sense to accelerate that.

[skives]

I am 35 and my wife will be 30 in March 2019. I currently have 112k split between a 401k and roth 401k and my wife has 29k between a 401k and roth 401k.

While based on the numbers I agree. I just would like the mortgage paid off.

Because tax rates are low and We would rather have mostly tax free income in retirement.

Why a Roth 401K? Just curious

In your case I would put the extra towards retirement.

Low mortgage rate, 13Y vs 8Y. I’ll guess you are not paying much in interest at this point of the amortization schedule. Doesnt seem to make sense to accelerate that.

[Jluke]

I get that mentality. I paid off a mortgage two years ago at age 39. We moved unexpectedly a year ago and I have a mortgage again. I have some experience there. It’s even documented here in the mortgage thread.

Do you have a large cash savings?

the reason I ask is say the furnace, roof, carpets need replaced or there is a job loss or medical situation. Can you find a way to borrow money at less than your current mortgage rate if you don’t have the cash for it?

You haven’t mentioned kids but another example would be having money to pay for college.

Back to retirement. You are essentially losing 8 years of saving if you accelerate the mortgage.

ETA: do you get a match with the employer 401K? Can you pull your contributions out like you can a Roth IRA? Reason for asking is that maybe you would want to contribute up to your employer match. Put the rest of it in a Roth IRA so you can access your contributions if needed.

[skives]

No kids. We have 15k EF. On top of this money we should be able to save another 5k a year for emergency fund or to replace an old car.

[Jluke]

From a google search
Plenty of people are house rich, which is when they have quite a bit of equity in their homes. ... Being house rich and cash poor may also mean that a homeowner neglects to contribute to their retirement and other savings when they're strapped for cash on a monthly basis.

[skives]

So I just ran the numbers through a Roth IRA calculator at 10% return and the difference between paying the house off in 8 years and not funding an Roth IRA now and paying the house off in 13 years and funding a Roth IRA is 408k. In both these situations we would only be able to fully fund 1 Roth IRA till the house is paid off then we would be fully funding 2 Roth IRAs.

That really makes me think but man I really do want the house paid off ASAP.

Calculation on our current Roth 401ks says we should have 3.6 million by the time we are 60.

[Smallsteps]

I agree with Disneysteve it does not have to be an either or item.
While we can run numbers based on estimated returns on Roth or run the many what if scenarios. The bottom line is even making relatively small extra payments will accelerate your mortgage payoff. some people are strictly number people and others need that sense of progress on something like a mortgage. I would split some of the extra off for house and other to retirement.
Maybe in the next 5-10 years I could have made a bit more doing it the other way but if I am satisfied what $ amount replaces that satisfaction ?

[Jluke]

What is the mortgage balance?

Did you get a 15-year mortgage?

you mention $900 for mortgage. Is that the normal payment and is it just for principal and interest or does it include property taxes and insurance?

i am currently paying an extra $260-300 per month (varies) on the mortgage (30Y at 3.875%) but I’ve maxed my retirement accounts and have a large EF.

As smallsteps and disneysteve said it doesnt have to have to be all or none. You could always do $1000 per month instead of $900. Or you could figure out what payment amount gets it paid off in 10 years.

If you continue to save outside of retirement as well, when the mortgage balance hits 10k or so you will probably just pay it off then.

Lots of ways to think about.

[skives]

What is the mortgage balance?

Did you get a 15-year mortgage?

you mention $900 for mortgage. Is that the normal payment and is it just for principal and interest or does it include property taxes and insurance?

i am currently paying an extra $260+ per month on the mortgage (30Y at 3.875%) but I’ve maxed my retirement accounts.

Balance is $107,988.84

It is on a 30yr but we have always paid as a 15yr or just a little more. Normal 30yr payment is $557.84

It does not include property taxes and insurance. Just principal and interest.

[Jluke]

Balance is $107,988.84

It is on a 30yr but we have always paid as a 15yr or just a little more. Normal 30yr payment is $557.84

It does not include property taxes and insurance. Just principal and interest.

I figured you were already paying extra.

At the 100k point is where I really got the itch to pay it off.

So at the end of the payoff, you will have one less bill of $560/month. 900-560. Call it $350 extra.

You will also have $200k (?) tied up in the house that you can’t really touch without taking out a loan (higher rate mind you)

$350 + $422 means you have $772 (appx) right now extra per month.

That seems like good use of leverage to me to build up your savings and retirement now.

I edited my previous reply a little bit.

[skives]

I think what we will do is pay the house off in 8 years and each contribute $1,300 a year to a Roth IRA.