Which is a better use of our money? Contributing to our 401ks or paying down the mortgage?
rlc_60504 asked:
My wife and I are both employed. We are seeing around 2%-3% returns on our 401k investments each year. Our fund options aren’t that great. Here is what we are considering…Taking the amount we are contributing to our 401ks that IS NOT MATCHED and using it to pay down our mortgage. We would continue to put the amount necessary into the 401ks to get the matches. Since our mortgage rate is 5.625%, it seems like we would be getting a better return on the money than making the 2%-3% that our 401ks are returning on that money. I know that we would be decreasing the amount of interest we are paying on our mortgage each year and reducing the amount going into the 401ks so there are some tax implications. We are both contributing more that 10% to 401ks right now. Which is better? Paying down the mortgage or getting 2%-3% returns on our 401ks?
Eric
My wife and I are both employed. We are seeing around 2%-3% returns on our 401k investments each year. Our fund options aren’t that great. Here is what we are considering…Taking the amount we are contributing to our 401ks that IS NOT MATCHED and using it to pay down our mortgage. We would continue to put the amount necessary into the 401ks to get the matches. Since our mortgage rate is 5.625%, it seems like we would be getting a better return on the money than making the 2%-3% that our 401ks are returning on that money. I know that we would be decreasing the amount of interest we are paying on our mortgage each year and reducing the amount going into the 401ks so there are some tax implications. We are both contributing more that 10% to 401ks right now. Which is better? Paying down the mortgage or getting 2%-3% returns on our 401ks?
Eric
May 28th, 2009 at 7:07 am
Jamie
Pay the mortgage down, property generally has a better, guaranteed return.
May 31st, 2009 at 9:06 am
Gail
pay the mortgage….you will be able to save more money and contribute more to your 401k if you have LESS or LOWER bills
June 2nd, 2009 at 2:40 am
Melanie
In the long term picture you are better off paying your mortgage down. The returns on your 401K will still be there when you no longer have to pay on the mortgage. A good accountant can help you make the right decisions for your particular portfolio.
June 2nd, 2009 at 8:05 am
Christina
I don’t know what the correct answer is but I personally would continue to contribute to the 401K.
In my case, I doubled up on my 15 year mortgage and got it paid off quickly. Without a mortgage payment burden, I thought that I was going to have much more freedom to make other kinds of investments using the extra money.
However, after I finished paying off the mortgage, I didn’t save the extra money.
So, don’t fall into the trap I set for myself.
I think that the 5 percent mortgage rate will look mighty good in a few years.
June 5th, 2009 at 7:07 am
Vincent
Well, a lot would depend on how much your morgage payments are and how long you have left to pay. Here’s why:
You are making up to 3 percent on 401 K and paying 5.625 so you will be gaining 2.625 percent by paying off the morgage.
However, your morgage payments are also tax deductable on income tax so you will lose that deduction once your house is paid off. Figure your income tax without the morgage deduction using last years tax return as a baseline. If you lose more than 3 percent, then dont pay off the morgage. If the loss is less than 3 percent then pay off the morgage.
June 7th, 2009 at 4:54 pm
Martha
It seems that your idea to do something about the payments above the match for the 401K is the right one. I am not so sure about the downpayments, it depends on a few more things. Like since when do you have the mortgage, how long will it run, how do you project the extra payments will shorten the life of the mortgage. Where in your life cycle will you be then and so on. Did you play with some calculators the mortgage banks are having? Especially you should look how the ratio of interest % and principal changes in which time frame when you make extra downpayments. For myself I made the experience when I made an extra downpayment that it made me pay too much interest which were not reimbursed.
Have you thought about this 3rd option? Do you have an IRA and maxed it out? Perhaps you even qualify for a Roth IRA. The advantage is if you chose a direct broker (there are plenty, Fidelity, Etrade, and so on) and you manage your own IRA you can probably get a much better rate of return. I see an average of 8% for example in my IRA - which is tax deferred. And…with a new law in 2010 it seems it can be rolled over into a Roth IRA. So I would boost up a self managed IRA to the max.
If you did that already then a 4th option may be intersting since your return of 2-3% is lousy…..even if you have your IRAs filled up then a regular taxed brokerage account with a few well chosen (expense ratio, performance, management, etc.)mutual funds deliver 5% or more - normally. Capital gains and dividends are currently favorably taxed. And if you would invest for the longterm you could even chose a more aggressive portfolio. Independent financial advisors may be able to help. But all those discount brokers out there have a lot of good tools to guide you through scenarios.
June 8th, 2009 at 11:02 am
Kelly
You should talk to a tax advisor. The interest you are paying on your home may be tax dedutible, so that savings may outweight the advantages of paying your home off early.
Also 2-3% is not a good return. You should seek some advise from a financial professional or put the money into the money market or fixed account. Those are paying better than 3% now and there is no market risk.
June 9th, 2009 at 5:53 am
Thomas
Read the book “Total Money Makeover” by Dave Ramsey. He has really good information about things such as this.