Invest or pay off mortgage

[mermaid]

Hello, simple living forum friends! I used to be around a lot more under same screen name (Mermaid) at the old forums and have been lurking here for a while.

I am 50, and have a lot of money questions up for me right now. My partner and I live in a house I bought. We have a joint account and each have our personal accounts. We pay for the house from our joint account, and would eventually like it to be titled /deed in both our names.

I would really like to retire at 60, or at least go to working part time. She figures she'll work for much longer (she is a psychotherapist so that is doable). I bought the house because I had the down payment, and her credit was really bad at that time because of a long unemployment - her credit is much better now.

Right now, my question is, how should I invest my non-retirement funds vs. pay off mortgage, and what should I consider in doing so?

My numbers:
IRAs - Roth and Regular --- 242K
Personal Savings/Invests -- 31K - some earmarked to replace car

Mortgage @ 4.625% -- 123K (worth ~235K)

About 9K of the personal is in no-load mutual funds at Schwab and Vanguard, the rest is in savings accounts (Capital360, formerly ING Direct) earning less than the mortgage rate.

The idea of paying off the mortgage by the time I'm 60 is attractive, but if I'm using the calculator right that would take an extra $600 a month! $250/month to kill it by the time I'm 65. $250 would be tight right now, but some large expense may go away within about a year or so, which would make 250+ very doable.

I think I did the bankrate calculator right because I entered the current balance, 25 year mortgage and current interest rate and it came up with amount same as my current payment. Then I played around w/ adding additional amount each month.
My risk profile for probably 10K would be conservative because I would want it available for emergencies. For the remaining 21K, I would be comfortable with moderately aggressive. (terms from http://www.investopedia.com/articles.../03/050203.asp)

Thanks for any thoughts or advice!

[awakenedsoul]

Welcome back, mermaid. If it were me, I would pay off the home if I had an eight month emergency fund. I used Dave Ramsey's worksheets, and did his steps, in order. Things started to really take off at a fast rate, once I wrote out all of his plan and implemented it. Both he and Suze Orman are really into owning your home outright, and having no debt.

That said, I did have kind of a cash flow crunch after paying off my home. I didn't have enough in my emergency fund, so I got a second job. That made up the difference. Since then, I've been able to reduce my expenses, and it's all worked out. I've been able to save more money, now that I'm retired. I just spend so much less.

[bae]

I'd pay off the mortgage once I had some funds tucked away *safely* for emergencies.

Ask yourself the reverse question, perhaps it will help the analysis: would you take out a loan on your home to get money to invest?

[mermaid]

Thanks, awakenedsoul and bae. Sounds like it could be much simpler than I was making it!

To answer bae's rhetorical question, I certainly wouldn't take out a loan to invest, but I've seen some calculations saying "With rates so low, keep your mortgage and invest the extra to make more return!" Won't even bring up the multiple issues with that advice.

[iris lilies]

Thanks, awakenedsoul and bae. Sounds like it could be much simpler than I was making it!

To answer bae's rhetorical question, I certainly wouldn't take out a loan to invest, but I've seen some calculations saying "With rates so low, keep your mortgage and invest the extra to make more return!" Won't even bring up the multiple issues with that advice.

There are a lot of people who would invest the money rather than pay off the mortgage and would justify it with calculations of financial gain. And that's fine!

But I like the mental peace and security of having a paid-for house. So, I would pay it off.

[bae]

There are a lot of people who would invest the money rather than pay off the mortgage and would justify it with calculations of financial gain. And that's fine!

You'd have to have a pretty good investment in mind for that to pan out. Your first $250k/$500k of gains in the house are not subject to capital gains taxes. You are borrowing money from the home at 4.625% to invest, you have to find something that will return a higher rate than that after taxes to win. And then you need to look at the risk of the two approaches. You are basically earning 4.625% tax-free by paying down your loan, and there's *no* risk in the paying-down, except your check getting lost in the mail. (There's the risk of the value of the underlying asset, of course, that's a different problem entirely).

[iris lilies]

You'd have to have a pretty good investment in mind for that to pan out. Your first $250k/$500k of gains in the house are not subject to capital gains taxes. You are borrowing money from the home at 4.625% to invest, you have to find something that will return a higher rate than that after taxes to win. And then you need to look at the risk of the two approaches. You are basically earning 4.625% tax-free by paying down your loan, and there's *no* risk in the paying-down, except your check getting lost in the mail. (There's the risk of the value of the underlying asset, of course, that's a different problem entirely).

Well, I believe that the young mustachians over on the MMM site who advocate this are blinded by the stock market gains of the past 12 months. It's been a heady ride for some of them, those who haven't been in the investment game for very long.

[bae]

Well, I believe that the young mustachians over on the MMM site who advocate this are blinded by the stock market gains of the past 12 months. It's been a heady ride for some of them, those who haven't been in the investment game for very long.

That's fine, more power to them. I'll need people to do my gardening and ditch digging in another few years :-)

[Yossarian]

You are borrowing money from the home at 4.625% to invest, you have to find something that will return a higher rate than that after taxes to win.

I agree you have to take taxes into account, but just to be clear isn't the test whether your after tax return exceeds your after tax cost of borrowing (and not the nominal rate)? That said, my house is paid off.

[bae]

I agree you have to take taxes into account, but just to be clear isn't the test whether your after tax return exceeds your after tax cost of borrowing (and not the nominal rate)?

Ayup. "after taxes" was meant to apply to both.