Extra mortgage payment

[cup of tea]

We refinanced our $86,000 mortgage @3.25. We want to make an extra payment each month so we can be mortgage free in 6 years. The value of the house 220,000. We are 35 yrs old and have two young children. Should we make an extra payment each month or invest it? We have no other debt.

Take home: 5,000

Savings: 20,000
College: 20,000
Stocks: 15,000
401K : 40,000

[disneysteve]

Do you have a 6-month emergency fund?

Are you investing 15% of gross for retirement?

Are you saving 5% of gross for other needs?

If the answer to all 3 of those questions is yes, you can consider prepaying the mortgage. Keep in mind that a 3.25% rate is only about 2.44% when you factor in the deduction. It isn't hard to do better than that by investing so it really comes down to a peace of mind thing. Personally, we do prepay our mortgage but from a strictly dollars and sense standpoint, we'd probably do better investing the money.

[bjl584]

We refinanced our $86,000 mortgage @3.25. We want to make an extra payment each month so we can be mortgage free in 6 years. The value of the house 220,000. We are 35 yrs old and have two young children. Should we make an extra payment each month or invest it? We have no other debt.

Take home: 5,000

Savings: 20,000
College: 20,000
Stocks: 15,000
401K : 40,000

I would've refinanced to a shorter term mortgage if your goal was to pay it off faster. You don't have to do the standard 30 or 15 year note. You can do whatever you want pretty much. You could've probably refinanced to a 6 year loan and had it paid off in 6 years.

But, on the other hand, you won't have a hard time beating 3.25% if you invest the money longterm. It depends on your goals and future plans. Do you want to be debt free quickly? Do you want to have a large retirement net worth? What are your attitudes and feelings toward carrying debt?

[Petunia 100]

We refinanced our $86,000 mortgage @3.25. We want to make an extra payment each month so we can be mortgage free in 6 years. The value of the house 220,000. We are 35 yrs old and have two young children. Should we make an extra payment each month or invest it? We have no other debt.

Take home: 5,000

Savings: 20,000
College: 20,000
Stocks: 15,000
401K : 40,000

Do you have Roths? I would consider maxing those before prepaying your mortgage. Your money grows tax-free, you will eventually withdraw it tax-free, and in a pinch you can access your contributions at any time with no penalty.

You and your wife can each salt away 5k per year.

[JoeP]

Do you have Roths? I would consider maxing those before prepaying your mortgage. Your money grows tax-free, you will eventually withdraw it tax-free, and in a pinch you can access your contributions at any time with no penalty.

You and your wife can each salt away 5k per year.

This was my exact thought as well. What are your plans for the payment money if you do pay off your mortgage in 6 years?

[cup of tea]

My husband likes the idea of not having a mortgage, After we pay off our mortgage we will use that money to put into our retirement funds and college funds. Our children will be in middle school by then. We will need savings for braces, camps, etc. I think we would do better if we just just pay the minimum on the mortgage and invest the rest into a ROTH. My husband and I have different points of view on this issue.

[snafu]

We were in a similar position a few years ago albeit mortgage rates were significantly higher. We elected to pay down the mortgage by doubling the principal portion and investing a similar amount in an Index mutual fund. The result was the mortgage was paid off faster than expected [the numbers we ran] due to the way amortization works.

The MFs have done reasonably well but there have been bad days when I got a stomach ache looking at quarterly results. [I still have a USA specialty fund that is below my actual contributions]. It's important to have a plan for the sums no longer going to mortgage less municipal tax, home insurance, and maintenance fund. I plan to deplete that once again by having hardwood & engineered flooring installed in 3 of 4 levels. [poor DH, he breathes easy and I make spend-y plans]

[NuggetBrain]

At 35 with only 40k in your retirement between the two of you I'd focus more on beefing that up over paying my mortgage off early.

[feh]

At 35 with only 40k in your retirement between the two of you I'd focus more on beefing that up over paying my mortgage off early.

I agree. Given your balances, I'd direct budget surplus at retirement savings.

[cup of tea]

We're both teachers. We will each have a pension when we retire. I still think we will need more for retirement though.

[JoeP]

We're both teachers. We will each have a pension when we retire. I still think we will need more for retirement though.

How certain are you of that? Not for nothing, but public sector benefits have come under a lot of fire lately, with concessions in some cases. We're not in the public sector, we don't trust Social Security for any income, and we're taking matters into our own hands.

I'd set up an IRA and a Roth if possible, and start putting as much as possible into those.

[feh]

How certain are you of that? Not for nothing, but public sector benefits have come under a lot of fire lately, with concessions in some cases.

The same thought crossed my mind. Additionally, a career change may take place.

[mortgage man]

pay off your mortgage as soon as possible

The rates are cheap which allows you to pay off your mortgage sooner. Any investment is risky - your own mortgage would be the safest option for you to invest!

[disneysteve]

Any investment is risky - your own mortgage would be the safest option for you to invest!

That's true. Every investment does have risk. Investing in pre-paying the mortgage also has risk. By taking the route of prepaying the mortgage at 2.4% after the deduction is figured in, you run the risk of not growing your money sufficiently to build up a large enough nest egg to retire when you wish to.

There is no such thing as a risk-free investment. Prepaying your mortgage is not without risks of its own.

[dczech09]

At the age of 35, you should have between 1.60 and 2.00 times your income in retirement savings. You are a little behind the boulder there.

You have a $20,000 savings account balance. Is that an emergency fund? If so, you should be fine there.

There was the mention of saving 15% for retirement and 5% for all other expenses.

My recommendations:

Save up to 15% of income for retirement through 401k/403b and Roth IRA.

Once you have hit that mark, make sure you are saving for upcoming expenses. Personally, I save for expected expenditures about 3 months in advance (this gives flexibility).

Once you have done that, then you and your spouse need to figure out what to do with the rest. Invest for the future? Pay down the mortgage? Both?

From the sounds of things, one person likes the idea of paying down the mortgage while the other likes investing more. Why not do a combination of both? Pay extra on the house and invest more for the future. Kill two birds with one stone.

Ultimately you do not need to limit yourself to just one alternative. And just like the others have been saying, there is no "risk-free" alternative.