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1. What is your mortgage interest rate? Is it fixed or an ARM?
2. How long do you intend to live there?
3. What is your local real estate market like? Still going down? Flat? On the way up again?
4. What are you doing for retirement beyond maxing 401(k)? Are you on track to have about 20x your income in retirement savings by age 65? ($45k x 20 = $900k). You probably need to be saving 15% of take-home exclusively for retirement each year- via 401(k), Roth or traditional IRAs.
5. What emergency fund do you have saved? If you are a single-income household, you should have 12 months living expenses saved in a liquid CASH account- money market fund or high interest savings account (something you could withdraw from in 24 hours or less in case of emergency)
6. Do you itemize or take the standard deduction? This helps answer the tax implications.
7. How much did you put down on your home? What is your approx $/% of equity today?
You are very very young and have the math magic of compounding interest on your side. If I were in your shoes, I would make the following my financial priorities, assuming you already have an emergency fund of some sort:
1. Increase retirement savings to 15% of take-home.
2. Figure out how much more cash you need to fund a 12-month emergency fund and divide that number by 12 or 24 so you fully fund that in the next 1-2 years.
3. Invest a set $ amount monthly in stocks or other high-risk / high-reward investment.
4. After all of that, increase mortgage principle payments to pay off mortgage in 10 years. Assuming you made a hefty (20%) down payment AND have 20-25%+ equity at current market value AND your interest rate is under 5.5%, no need to hurry to pay off this low-cost loan.
You have a house with a $100,000 mortgage on it. You make $45,000 a year, plus your friend is living in the house and paying you $600 a month in rent.
After expenses (including max 401k contrib), about $1200 a month is left over.
Would it be better to make extra payments on your house so you gain equity, and own it outright in about 8-10 years or invest elsewhere?
I will lean towards paying off the house in 8-10 years. Peace of mind of owning a house outright is exactly that, peace of mind. However, I would not do it at the expense of being broke and not being able to enjoy yourself a little. If it was me, I would balance the extra $1200 into saving money, paying off the morgage, and a enjoying life a little.
Many will say invest it elsewhere, but i like paying the house off. Here's why: If you get into financial trouble you could lose the house and all the money you put into. Interest rates are low, so many will say put your extra money into the market because the returns will be so much better. And thats true, but that also assumes you dont lose the house later on.
Even if you own your home outright, there are still expenses you can't escape. If you get into trouble financially, your paid-off home can still be foreclosed on due to non-payment of property taxes or HOA dues, which can add up to $3,000-$5,000 per year on a $100k range home in some areas.
Location: We_tside PNW (Columbia Gorge) / CO / SA TX / Thailand
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Quote:
Originally Posted by TurtleCreek80
Too many variables to answer:...
You are very very young and have the math magic of compounding interest on your side. If I were in your shoes, I would make the following my financial priorities, assuming you already have an emergency fund of some sort:
1. Increase retirement savings to 15% of take-home.
2. Figure out how much more cash you need to fund a 12-month emergency fund and divide that number by 12 or 24 so you fully fund that in the next 1-2 years.
3. Invest a set $ amount monthly in stocks or other high-risk / high-reward investment.
4. After all of that, increase mortgage principle payments to pay off mortgage in 10 years. Assuming you made a hefty (20%) down payment AND have 20-25%+ equity at current market value AND your FIXED interest rate is under 5.5%, no need to hurry to pay off this low-cost loan.
I'm of this mindset ^^^^^^^^
I have always used CHEAP mortgage money to fund my OTHER real estate investments. (hint you need to be diversified in RE, just as you need to be in other investments).
Since TODAY's RE environment is much different that in the past...
I would get that house equity into some Real estate investment with the best long-term return (which is probably NOT a Single Family Residence (SFR)) you want POSITIVE returns in Both cash flows and equity growth.
RE is VERY 'local market' dependent.
Some principles (and guesses) for the new RE economy.
Focus on strong cash flows in areas desirable to retirees and elderly. (single story, nice, quiet, close to services / buses, in a college town and within a short drive / bus to medical, groceries, library.) (I personally don't think tomorrow's elderly will be living in FANCY independent living resorts). Elderly can often rent for long term (10+ years), and are great tenants. They PAY, they don't trash the place, they want a nice place to live, they keep an eye on things.
Buy properties that have a strong resale potential (view, convenient, attractive for rezone, cute, next to park...)
Buy 20- 30% below CURRENT market (it costs 10% to 'turn' a property, just in expenses, so buy WISE)
Buy quality, older brick or concrete may be better than newer construction (all depends)... do your due diligence !
Get a savvy commercial investor to help you. (Not someone that hasn't made LOTS of mistakes... hint, not too young)
Be creative, but not impulsive in determining purchases.
Use Owner finance WHENEVER POSSIBLE. (banks are spendy AND picky)
Get something paid off, or stash the cash to do so (probably something hard to finance... in my case that is an OLD mobile Home rental on a Pristine view 6 acre lot.)
Be (or find) a smart accountant. i.e. it is not a great idea for me to PAY-OFF a rental, as expenses on such property directly offsets gains.
Use 1031 tax deferral to 'upgrade' and diversify your investment properties.
If you are really good at real estate, you can turn your primary residence every two years for a fat TAX FREE gain. (Hint; immediately get the GAIN working for you)
Very soon you will be able to become your own bank. You can use some of those investments in equities to borrow against for short term monies (like buying a chunk of bargain Real Estate at auction). If investment properties are acquired correctly and cash flowing correctly, the banks (or wise friends) will be happy to lend you operating capital, using your RE as collateral.
By holding investment RE for long term, you will get it paid off in 15-20 yrs, and it WILL replace your salary, and you will be in Tahiti enjoying your passive cash flows. (instead of punching a time clock).
I vote for putting money into a retirement account - you can choose which type. Over the decades, the value will presumably grow. Gotta monitor it though. Can't just invest and let it sit because it may not grow.
Assuming you have a low fixed mortgage interest rate, first max out a Roth account with your extra money. If any money is left over, put the rest in an online higher interest money market account for emergencies and splurges. Don't start paying down the mortgage balance until the interest portion of the payment is so low that it doesn't pay to itemize your tax deductions any more. If inflation comes back in a big way a few years from now, prevailing savings account or CD interest rates may exceed your mortgage rate. In that case, don't pay the mortgage down at that point at all.
first max out a Roth account with your extra money. If any money is left over, put the rest in an online higher interest money market account for emergencies
You got this backwards.
First emergency fund then retirement accounts (401(k) and Roth), then investments in taxable accounts such as a stock index fund or something aggressive growth.
First emergency fund then retirement accounts (401(k) and Roth), then investments in taxable accounts such as a stock index fund or something aggressive growth.
I disagree. First, the OP is already maxing out a 401(k); the issue is what to do with $1200 in extra money each month. Regular Roth ira contributions (but not earnings or most conversion amounts) can be withdrawn without penalty at any time. The Roth contributions are already in essence an emergency fund if they're needed. Stock investments (especially aggressive ones) should be going into the retirement accounts first, and if the OP is already maxing out the 401(k) and also maxes out a roth ira, there's probably no need to have even more stock investments in a taxable account.
Last edited by AustinExPat; 01-08-2011 at 11:30 AM..
The first thing you should do is pay the home down to an amount that is at least 5% below the current going rate for homes selling in your area. This at least allows you some breathing room if you end up having to up and leave. My personal opinion would be to have your principle 10% below current selling prices and having a decent cash reserve. I would do this before investing in anything, even a 401(k).
Once you get to that point, then I would invest only in my 401(k) what the company would match. I would invest in more safer investments, and I will explain why in just a bit. After setting up the 401(k), I would finish off the mortgage. Having no mortgage allows you much more flexibility in life. Some will say if you bank the same amount of money in the market, you would do better, and could always use that money to pay off your home. They are correct, if you don't put your money into a restricted account like an IRA and you don't lose money in the market. With paying on a home, you basically get a guaranteed rate of return. Even if your home value goes down, your mortgage rate stays the same, so paying it off early saves you tons of interest paid to some lending company.
Now, what you could also do is pay just enough on the mortgage to make sure you still have some money left over for living life. You could always look at taking your 401(k) money in say 10 years and using that to finish off the mortgage. The one reason this should be looked at is because we do have politicians that really, really want to confiscate all private retirement accounts. If this were to come, the key would be taking the money out just before the confiscation occurs.
Also, your home doesn't really need to be paid-off, but paid down to about 50% of present costs would be good. Also, you could always re-fi at that time and get a much lower minimum monthly payment. Just remember, the market is manipulated, and if you get in at a good time, you win. If you get in at the wrong time, you lose. With paying your home off early, you win, even if the win isn't spectacular in terms of returns, you still win.
The first thing you should do is pay the home down to an amount that is at least 5% below the current going rate for homes selling in your area. This at least allows you some breathing room if you end up having to up and leave. My personal opinion would be to have your principle 10% below current selling prices and having a decent cash reserve. I would do this before investing in anything, even a 401(k).
Once you get to that point, then I would invest only in my 401(k) what the company would match. I would invest in more safer investments, and I will explain why in just a bit. After setting up the 401(k), I would finish off the mortgage. Having no mortgage allows you much more flexibility in life. Some will say if you bank the same amount of money in the market, you would do better, and could always use that money to pay off your home. They are correct, if you don't put your money into a restricted account like an IRA and you don't lose money in the market. With paying on a home, you basically get a guaranteed rate of return. Even if your home value goes down, your mortgage rate stays the same, so paying it off early saves you tons of interest paid to some lending company.[AND COSTS YOU FIVE TONS OF INVESTMENT RETURN]
Now, what you could also do is pay just enough on the mortgage to make sure you still have some money left over for living life. You could always look at taking your 401(k) money in say 10 years and using that to finish off the mortgage. The one reason this should be looked at is because we do have politicians that really, really want to confiscate all private retirement accounts. If this were to come, the key would be taking the money out just before the confiscation occurs. If you get in at the wrong time, you lose. With paying your home off early, you win, even if the win isn't spectacular in terms of returns, you still win.
This advice would be great if the original poster was a 60 year old widow.
It also sounds paranoid.
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