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RE: where do you get more, pay more?

Comment comment by Brandon on 16 November 2007

if your mortgage is 5% but you only make 4% on your 401 then put it in the mortgage. If your 401 gives you more than the mortgage put it in the 401.

I used to think it was as simple as comparing interest rates, but then I learned better. Things like taxes play a role, as does your home's potential to increase in value.

An interest rate comparison is still interesting, though. I estimate my home mortgage will have an interest rate of about 6.5% and I expect to pay it off in less than ten years. My Roth IRA at Fidelity has the following profile from 1926-2006:

  • Average Annual Return: 9.25%
  • Worst 12 month return: -52.92%
  • Best 12 month return: 109.55%
  • Worst 5-year return (annualized): -10.43%
  • Best 5-year return (annualized): 27.23%
  • Worst 20-year return (annualized): 3.10%
  • Best 20-year return (annualized): 15.62%
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RE: where do you get more, pay more? by scubasteve :: NR4

Put it in the Roth. Putting the $8k into your house is not earning you any return. Yes, it may save you some interest, but like you said, you're going to itemize your interest expense anyway. Your house is going to appreciate (or depreciate) the same regardless of whatever your down payment is. Its based on market conditions. If you sold your house in 10 yrs, your $8k would still come out as $8k. But in 10 yrs in the Roth, your $8k will be will almost be $20k at 9.25%. Granted, you can't touch it and you'll pay taxes on it at withdrawal time, but you'll still be much ahead when you retire. Do the Roth.

Posted 17 November 2007, Hide, Parent, Reply