Home Question

[Throwin Darts]

Ok...I got curious what the break even point would be on payoff of the house vs investing.

If you made the assumptions:
$200k house, 4% and paid an extra $500/mo. Your house would be paid off in 15.3 years saving $75,354
Investing: Starting $0 and invest that extra $500/mo for 15.3 years at 8% you would earn $85,945 in interest.

Now same type scenario but more money each month:
$200k house, 4% and paid an extra $1000/mo. Your house would be paid off in 10.4 years saving $98,215
Investing: Starting $0 and invest that extra $1000/mo for 10.4 years at 8% you would earn $67,745 in interest. At 12% interest via you are withing $2k of each other.

I think those numbers as far as home interest and investing interest are realistic. If you are interested, Im using these calculators:

https://financialengines.com/education-center/topics/calculators/early-mortgage-payoff-calculator-should-i-pay-off-mortgage-or-invest/

https://www.daveramsey.com/smartvestor/investment-calculator

And my personal scenario:
$125k loan at 4%, $1500 extra a month, paid off in 5.5 years saving 74,876
Starting at $0 investment, investing $1500/mo for 6 years profit $55,602 at 12%

are you maxing out your 401k and retirement accounts? if not, your calculations are worthless.

run the same math but use a scenario where option 1 is you compounding returns within your 401k and option 2 is the prepayment of mortgage debt.

in option 1, every dollar you make is invested. in option 2, every dollar you make is hit with income tax before it is used to prepay debt.

[8mpg]

are you maxing out your 401k and retirement accounts? if not, your calculations are worthless.

run the same math but use a scenario where option 1 is you compounding returns within your 401k and option 2 is the prepayment of mortgage debt.

in option 1, every dollar you make is invested. in option 2, every dollar you make is hit with income tax before it is used to prepay debt.

I dont have a 401k. I work for the state. We put in 7% and they match 7%.

Again, to play devils advocate. Maxing a 401k is not possible for everyone depending on their disposable income. So in my first scenario if you were in the 25% tax bracket you'd make $107,432 in that 15ish years. So yes, you make more. But what I think you are leaving out is taxes when you withdraw at some point. Even at the 15% range you lose money to the government. To make numbers easy, lets round down to 10% because you will not withdraw all at once. So, theoretically (for simple numbers) you actually net $96,888. So you are correct, you are ahead.

[Throwin Darts]

I dont have a 401k. I work for the state. We put in 7% and they match 7%.

Again, to play devils advocate. Maxing a 401k is not possible for everyone depending on their disposable income. So in my first scenario if you were in the 25% tax bracket you'd make $107,432 in that 15ish years. So yes, you make more. But what I think you are leaving out is taxes when you withdraw at some point. Even at the 15% range you lose money to the government. To make numbers easy, lets round down to 10% because you will not withdraw all at once. So, theoretically (for simple numbers) you actually net $96,888. So you are correct, you are ahead.

You are talking about putting a dollar here or there. No one is talking about one's ability to max out a 401k. If you have a dollar to pay down your mortgage then you have that same dollar to invest somewhere else.

If you make a dollar and can invest it pretax you need to run your scenario with a dollar invested. All money that will be used to prepay a mortgage will be after tax dollars so you will need to pay income tax on that same dollar and invest the remainder. If you are in the 25% bracket then you need to run the scenario investing 75 cents for every dollar you are investing in the retirement account.

Then you will need to see which rate of return you would need on the investment to outperform the return (interest rate forgone) on the prepayment of debt.

[8mpg]

Thats whath I did. I added 25% extra to the investment. Instead of $500 to invest a month, it became $625. This is very generous as most Americans dont pay a marginal tax rate of 25%.

I just looked and its 17% marginal for $100k income. Dropping it to $585/month which is taking advantage of the pretax, you make $100,556 in 15 years. Minus 10% you are right around $90k post tax in 15 years. So your $15k ahead in scenario 1

[kae006]

Your profile says that you are a financial analyst. While I am also in the camp that paying down/off debts is never bad, what do you think you could get for an annualized return on your cash by investing it?

[kae006]

I dont have a 401k. I work for the state. We put in 7% and they match 7%.

Again, to play devils advocate. Maxing a 401k is not possible for everyone depending on their disposable income. So in my first scenario if you were in the 25% tax bracket you'd make $107,432 in that 15ish years. So yes, you make more. But what I think you are leaving out is taxes when you withdraw at some point. Even at the 15% range you lose money to the government. To make numbers easy, lets round down to 10% because you will not withdraw all at once. So, theoretically (for simple numbers) you actually net $96,888. So you are correct, you are ahead.

Working for the State does not preclude you from participating in a 401k. I worked for the state for several years and contributed to a pension as you describe, but also contributed to a personal 401k made accessible to me by the State. I imagine we had the same options available to us, but if for some reason you don't you could still contribute to an IRA. I wouldn't rely on a state pension for my entire retirement income.

[Wakehunter]

My wife and I decided to go ahead and pay ours off last year (Approximately 15 years early). Cars were paid off as well. It's been great! All that money goes straight into the bank. Now we're saving to pay cash for a piece of property. Once the property is purchased I will sell the house and build a barndo on the property. Debt free is the only way to live for me!

[2014FusionM]

Your profile says that you are a financial analyst. While I am also in the camp that paying down/off debts is never bad, what do you think you could get for an annualized return on your cash by investing it?

Lol a financial analyst for a government defense company, things work a little different than say a financial analyst for retirement or person wealth lol!

[Bort]

The myth that a mortgage helps you on taxes is not completely accurate. You can deduct your interest paid on your mortgage, but it only reduced your taxable income. So lets say you pay $1,000 in interest and your tax rate is 25%. You will "save" $250 on taxes, BUT you had to send the bank $1,000 to do that. I think it's better to send the $250 to Uncle Sam and keep the other $750. Or if you don't want to pay the $250 in taxes you could donate $1,000 to a charity.

Y'all are in a great place and will do great because you are paying attention.

[8mpg]

Working for the State does not preclude you from participating in a 401k. I worked for the state for several years and contributed to a pension as you describe, but also contributed to a personal 401k made accessible to me by the State. I imagine we had the same options available to us, but if for some reason you don't you could still contribute to an IRA. I wouldn't rely on a state pension for my entire retirement income.

We are offered a 403b. Im not 100% betting on that retirement and plan on purchasing rental properties for the majority of my retirement money.

[kae006]

We are offered a 403b. Im not 100% betting on that retirement and plan on purchasing rental properties for the majority of my retirement money.

Every year you spend working towards owning multiple rental properties in a year of missed compound interest that you'll never be able to get back.

[bowhntrmatt]

I'm in a very similar situation to you. I'm 29, my wife 32 and we have no debt other than the house. Both vehicles are paid for and under warranty. I decided to set a 5 year goal for paying off the house we bought about 6 months ago. All I can think of is the freedom that will come from being our age and income without debt. I'm maxing out my company retirement now but plan to send about 50% to investments once we are debt free.