- quote -

The first step is to calculate the after-tax interest rate of your mortgage.

- quote -

Don't forget that mortgage interest is also deductible for state income
tax purposes. Let's assume the state marginal rate is five percent,
resulting in a total marginal tax rate of 20 percent. So the after-tax
interest rate is 4.3 percent. If your earnings increase and you move into
a higher tax bracket, the after-tax interest rate will go down.

So the question becomes, can you earn more than 4.3 percent on some other
investment over the next 28 years? Almost certainly the answer is yes. But
let's not forget what other posters have emphasized. Prepaying the
mortgage is a sure bet and other investments are not. Even if you invest
in a bond fund, there might be years when interest rates rise sharply and
you lose principal. Only you can decide if you're comfortable with the
level of risk that comes with investing your extra montly money that way.

Who says this has to be an either/or proposition? Why not take half of
your extra money and prepay the mortgage? Take the other half and invest
it elsewhere.

FranksPlace2[at]gmail.com wrote:

- quote -

But they don't have as good a selection of index funds
(especially in the bond area).

Anoop

I agree with herlihyboy!

Also I would invest in equities such as index funds. Make your money
work for you. I believe Fidelity now has lower management fees than
Vanguard.

Frank
herlihyboy wrote:
- quote -

s o wrote:
- quote -

Paying extra principle on your mortgage is the financial equivalent of
putting that money in a risk free investment which pays about the same
interest rate as your mortgage.

To be comparing apples and apples, you have to be looking at
essentially zero risk investments like treasury bonds. Right now 10
year treasuries are yeilding about 4.18% and 30 year are yielding about
4.7%.

Of course you need to take the mortgage interest deduction into account
to determine your true rate of interest on your mortage. However, the
way you did it is not really correct because it doesn't take into
account the fact that if you didn't itemize you would still get the
standard deduction (which I think is $9,700 for a married couple). Your
real mortgage interest subsidy is only the difference between your tax
burden with itemized deductions and your tax burden with the standard
deduction. And this is not just theoretical; as you reduce your
mortgage interest deduction by paying down your mortgage with extra
principle payments your taxes will slowly climb until you hit the point
where your itemized deductions equal the standard deduction, at which
point they will stop climbing.

It would take a spreadsheet which considers your tax bracket, other
deductions, and marital status etc to figure out exactly what
investment rate of interest would be break-even for you.

Andy

is your wife close to same age as yourself? What is the amount your
401k+IRA is projected to be at age 59 1/2? Implying you could:

a) save the extra $330 into an IRA for your wife and close any savings
gap which exists
b) save a portion of the $330 into an IRA to make up a savings gap
c) spend the $330 because your are saving enough and someone needs to
spend money to keep the economy going
d) pay down the house because there is no savings gap

I would probably use b) for myself.

you stated your age was 33 and have 28 years left to pay off mortgage.
If you put $250 into the IRA and $80 into the mortgage the extra $960
mortgage payments each year should reduce the principle enough that the
mortgage is paid off prior to age 59 1/2 (instead of age 61 which is
your present mortgage payoff age). This also adds $3000/year to Roth
IRA for wife.

Also consider that you could sell your house and downsize your living
quarters when you reach age 60 (maybe no steps, a condo where you don't
want to shovel in winter or mow lawn in summer). I wouldn't have
paying down mortgage ranked ahead of retirement savings at a young age.
But I only plan for myself, I don't do it for a living.

herlihyboy wrote:
- quote -

Sorry, I should have been a bit more precise in my original post. The
extra $330 is what is remained after I've already put in my 401k, my
own IRA. I guess the detailed question should have been: should I

a) setup another ROTH IRA under my wife's name, make tax-free profit
with it until we're 59 1/2, then pay off the house or

b)pay extra into the house each month.

If going with plan a, what's the appropriate investment vehicle? bond
funds?

thanks.

s o

I would max out my retirement investments so that I was at about 15% of
my gross income going toward retirement. Once that is set up, and I
have liquid money available for emergencies, I'd work on the house. I
don't want to be retired with a paid-for house, but no nest egg to live
from. I would do matching plans first, then Roth IRAs for me and for
my wife.

Hi all,

I have an extra $330 I can put away each month. I need to decide if I
should pay extra into my mortgage or invest it in an Roth IRA. Here're
my details:

mortgage interest rate: 5.375%
years remaining in mortgage: 28
monthly mortgage amount (not including property tax and insur.): $827
my current tax bracket: 15%
I'm using itemized deduction each year, so my mortgage rate is only
4.56%. This is calculated from 5.375% x (1 - 15%)
my age: 33

If I choose to invest the extra money in a Roth IRA, I'd like to
liquidate it and pay off the house when i turn 59 1/2. The rate of
return on my investment should be at least 4.56%. Are bond funds a
good choice in this case? Or should I simply pay extra into the
principal each month instead? any comments are appreciated. thanks.

s o