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Sheri, one way to look at it is that if you invest in paying down your mortgage it is as if you are getting a 100% safe investment that pays 5.875%. It is as if you are putting it into a CD paying 5.875.
Also, consider that paying down your mortgage doesn't have to be an all or nothing thing. I am currently putting an extra $200 into my mortgage which will pay it down to zero in 7 years when I will be 60.
I use bankrate.com's mortgage calculator to see how putting extra money into my mortgage will affect the length of the mortgage.
Sheri, one way to look at it is that if you invest in paying down your mortgage it is as if you are getting a 100% safe investment that pays 5.875%. It is as if you are putting it into a CD paying 5.875.
Not really. Because I have to pay 35 percent of the money I earn on taxes first ... so ...
If I don't pay that money into the 401K instead ... I lose the opportunity to make money on 35 percent of my income that would ordinarily go to taxes ...
It's basically a lost opportunity cost that could far exceed the 5.8 percent I'd save on mortgage interest (which, again, is really only 5 percent after the mortgage interest deduction).
By my calulations I'd actually lose anywhere between 3 and 9 percent, depending on how well the stock market is doing.
Granted, you eventually have to pay taxes on any money you withdraw from the 401K once you retire but ... over 20 years ... 3-9 percent lost investment income could make a big difference in how much I end up with in that account over the long term.
What is always missing in the math calculations that will be revealed in actually calculating it in a spreadsheet with ALL the costs factored in and that none of the subsequent posts took into account is the tax hit on your interest earned or the fees you pay in almost every investment vehicle. These are real dollars spent.
Yeah ... I hear ya. I dealing with a new job and new 401K/457 plan so ... I'm playing around with the different investments just to see what the real yields are ... what they claim and what they actually pay can be two completely different things.
As far as fees, it's minimal ... $1.50 a month for each account. Nothing else .. unless you go with a direct stock brokerage account, which I haven't tried yet because, I don't feel good about jumping into stocks again just yet.
As for the tax hit on interest earned ... that's not going to apply to the 401K until I retire in 20 years but, in the meantime, the investment income could make a big difference in what that balance will look like over the long term.
Good points. And your mortgage rate is very low, so putting it to a 401k makes sense. My rate is adjustable, currently at 7% and I like the idea of being mortgage free at a certain point (earlier than 30 yrs) so I just consider it a safe investment in addition to the stocks and bond funds in my 401k.
I think you are on the right track for investing instead of payoff off the mortgage, with investing into a 401K that is pretax dollars and like you said you are now paying 35% taxes. If you were to pay off your mortgage you wouldn't have that tax shelter in a sense for the home.
My husband and I will will transfer some money into a 72T draw on it to pay our mortgage and hoping that the interest paid on the house will offset the taxes paid on the 72T. Who know's we may be shooting ourselves in the foot doing it this way but it's the best idea that we've come up with, and we are set to retire next June so we are hoping that we are making good choice.
When I paid down my mortgage, I also maxed out the 401k contributions so I wasn't trading that away. Situations differ so doing the numbers may turn up a different result than my numbers did.
When I paid down my mortgage, I also maxed out the 401k contributions so I wasn't trading that away. Situations differ so doing the numbers may turn up a different result than my numbers did.
Obviously there is no clear cut answer to this. As you wrote, situations differ. Even with the numbers staring you in the face, it still may not feel right to do what the numbers seem to suggest. IMO, that the best solution is to do what feels right in your gut, and trust that you've made the right decision.
( As a data analyst, I work with numbers all day long, and I've seen over and over again, that the numbers don't always mean what they appear to mean. Numbers don't lie, but they don't necessarily tell the whole truth either. )
blessings...Franco
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