I have been paying down my mortgage, but the idea of a Roth keeps nagging at me.

My mortgage is 5.875%.  I cannot refinance it because I owe < 50K.

Should I throw $5500 at my 5.875% mortgage, or open a Roth with Vanguard?  Which makes more sense?

Personally, I'd likely do a Roth, but this is dependent on many things.

Age, income, debt goals, retirement goals, etc.

On a simple math level - do you think you can earn more than 4-5% return on the Roth investments over the same term as your home payoff date?  Math wise, there is your answer.

However, from a total financial perspective, if this home is your only debt, you have a fully funded emergency fund, and you are already putting 15% of your income in retirement savings, getting completely out of debt might have a bigger impact on you long term.... from a mental strategy and emotional well-being perspective, which must be taken into account.

Cash is King.....

You will always do better if you keep the cash and grow it via compounding vs paying down a fix rate loan.

I would recommend that you do a home equity loan - just pay the interest and bank the rest - making some money.

Check out a book "untapped riches - never pay off your mortgage"

Red

Could you explain this in a little more detail?

With a mortgage, you pay some to principal and some to interest every month. As the term progresses, you pay more principal and less interest each month. This is because there is less principal remaining, and therefore there is less interest accruing on the remaining principal.

The reverse can be said for compounding investments. When you invest money, on average, you will see a positive return. For simplicity's sake, say each month the "interest" (could be savings account interest, stock market gains, savings bonds, etc.) you earned is added to the starting balance. Now, the next month, you earn the same growth rate, but it's on the total of the initial investment plus last month's "interest". Then, the next month, the growth rate applies to last month's balance plus last month's interest. So on and so forth. Each month, the principal balance is increasing and the interest earned each month therefore increases.

Also, with mortgage rates so low right now, many times it is a better return to invest the money vs. paying down a low-rate mortgage.

Roth

No, you won't.  Interest works both ways.

It comes down to how much do you pay in interest owed, vs how much you can earn in interest/dividends (total return) from an investment.  (plus other factors like tax implications)

These statements are always based on the *assumption* that you will earn more on the investment, than you pay, over the long term.  That might, or might not be true, and one must take into consideration the risk.  For aggressive minded people, this is always a simple equation.  For the risk averse, they actually have to do the math and weigh the benefits.

Are you going to earn 5.875% in the Roth?  If not, pay down the mortgage, then open the Roth.

Pay down the mortgage.

You are not measuring one thing and its called RISK! The grass feels different with a paid for house

You wouldn't borrow money to invest. Get the house paid for and eliminate the debt.

Ditch the house debt. Assuming you have job security and the likelihood of a market crash(we have been doing WAY too well for the past 5 years, I'm thinking we are due in 2-3 years for a crash), the extra cash income you have that isn't going into your house payment each month would be great to have to buy shares in companies that are solid and will be headed back up.(ATT, CISCO, AMAZON, Catapiller, GE ect ect) if the general market drops say 30%-40% over where it is now and recovers back that ground and then some you have done WAY more than the initial compounding of the 5k in your roth could do(since you bought high, and held (= few shares, some growth and dividends), vs bought when it was low and held( more shares, more growth, and  fewer dividends but share price growth should balance that out in a big way).

Im by no means a fincial advisor, there are people that get paid and go to school to give out advice like that.

You can only put a max of $5,500 into your Roth each year.

If you wait four years to put a single dollar into it, you can't go back and add four years of contributions in a lump sum. Time value of money compounding is what's at stake.

A $50k mortgage balance is nothing. You already paid the majority of your interest up front in the earlier years, assuming you had a 30yr mortgage, and it was initially for $200k.

There's already the risk factor, but that's the great thing about a Roth. You can always pull out your contributions at any time, tax and penalty free. You cannot however, pull out the earnings, without tax or penalty, assuming you're under retirement age.

Say you deposit $5,500 into the account for 2016. You can just let it sit, or do something with it. Either way, at least the contribution is made before the cutoff date in a few months. You suddenly need a new roof, and are in a bind. You can pull that money right back out.

If you could, would you be willing to borrow money at 5.875% and invest it in your Roth?

Not sure where that's coming from. I'd find a new broker or mortgage lender, I've seen plenty of $10K-$20K mortgages. And your rate sucks but I'm sure you know that already.

Edit: unless you meant your mortgage balance is >$50K and your LTV is too high based on the current value. If that's the case, I'd throw everything at the mortgage until the balance is low enough to refinance out of that rate, then invest in the Roth IRA. Rates are going up so I'd do that as quickly as possible, or if you have the cash available now, just lock your rate tomorrow and pay the balance down at closing

 Where?  You have seen lenders offer a refinance of a home mortgage with a $10k-$20k mortgage balance?

There is no money in that, and the refinance charges would likely outweigh any benefit for the homeowner.


The question is absolutely valid.  If your home was paid for - would you borrow money at the current rate, so that you could go invest it?

You're twisting what Dave says, and you most certainly don't wait to invest until after your mortgage is paid off. Step 4 is invest, step 6 is pay off mortgage.

Oh, I am not making advice based on DR.  If this was a total financial recommendation.... then you have to ask ALL the items... do you already have 6 months expenses, do you already save 15% of your income for retirement (if you did and followed DR, this would be moot, because you'd already be invested in a Roth), do you fun your childrens college.....    THEN you can consider additional principal.

So two responses to you -  

1.  I took this as more of a "one vs the other" and you will see above I recommend the Roth.

2.  I don't follow DR 100% verbatim.  While I did read his book and putting his initial steps in motion DID change my life.... I don't propose that it is for everyone, nor the only way.

Yes, I work in the business although I am usually on the portfolio side. Usually the limiting factor with small loan amounts is the allowable fees which as you noted can outweigh the benefit - this is amplified as the loan amount decreases and is also subject to additional regulatory limitations, but $50K refinance loans are not all that uncommon.

If his refinance loan wasn't able to meet the points and fees requirements, it would probably be beneficial to just do a cash out at a higher loan amount if he has enough equity just to get rid of that rate and then pay the cash out to the principal balance. He could possibly even recast the loan at that point if the servicer/lender allows it. My point is that the 5.875 rate is garbage when we've had 3.25-3.5 30 year fixed rates for 5+ years, and rates are only going up from here.

That's a really neat idea.  I dig it.  But the next question would be - "what's your credit score like?"  

That's a nice catch phrase and I do respect a lot (most) of DR principles, but life is not a series of binary choices. The simple fact is that OP has to incur a lot more risk to beat his shitty (I'm assuming fixed) rate right now. In this case would I chance 5.875 to maybe earn 10? Probably not. Would I chance 3.25 to maybe earn 10? 3.25 is likely long gone but maybe, and we all have our own individual tolerances. What worked for you won't always work for me or for OP, but for a lot of people who have no idea what the risk is or what their tolerances are, I agree that what you're saying is prudent.

LOL nice try. I have no concern with my credit score as I haven't seen it in at least 10 years. I may not even have one at this point. I'm the last person to advise someone to take on more debt. My point is that OP is living with a 2005 rate when we're in 2017.

Sigh.  I was talking about HIM. The OP who needs the loan.

My mistake and my apologies for my curt response. For the record: I am of the opinion based on OP's posts that he would be better served by paying down the mortgage balance rather than investing in a Roth or traditional IRA if he's unable to refinance to a lower rate for whatever reason.

I don't think rate of return is necessarily the biggest (or at least not the only) issue here.

One thing about a Roth IRA is that there is a contribution cap each year.  It's not like you can skip this year and then double up the next year to catch up.  If you miss the cut for 2016 then that contribution opportunity is gone forever.  Conversely, you can always come back and double up on mortgage payments.

The other thing to think about is the tax implications.  You can deduct mortgage interest on one hand whereas Roth IRA gains are tax free.  Deducting your mortgage interest essentially reduces the effective interest rate on your mortgage.  Your 5.875% rate might actually be more like 4.406% after the impact of taxes if you are in the 25% tax bracket for example.  On the other hand, a 5.875% return in a Roth IRA is a 5.875% return no matter how you look at it since you will have no tax liability on that gain.

I'm not saying that this tax effect means you shouldn't pay down your mortgage but it certainly lowers the bar that your other alternatives have to get over to be superior.

With all that said, I think dollars invested today have less potential than they did in any other year over the past 8 years.  Stocks are trading at relatively high multiples of earnings to the point that I don't think a 5.875% return in dollars invested today is a lock by any stretch.  

I think the choice that helps you sleep at night is the better one in this circumstance.  A few years ago, I would have said Roth IRA no question and certainly posted as much in this forum.  I'd only tilt towards the Roth IRA today because I wouldn't want to waste the 2016 tax year contribution opportunity.

Mathematically the ROTH is the best bang for your buck and should avg 8% per year (historically), BUT.....Emotionally there is reasons to pay off your mortgage early, even at very low percentages. Being debt free isnt just a balance on some banks spread sheet, its a way of life.

I personally paid off my home this year. Could I have got better returns putting extra in my 401k? yes it got 9% in 2016 and my home loan was only 4.375%, but that feeling of waking up every morning knowing my home is MINE, not the banks and no one can ever take it from me is worth magnitudes more than a couple extra thousand dollar sitting in some 401k account. The sacrifices my wife and I made to pay off our home in 5 years, instead of 30, will stick with the rest of our lives and has permanently changed our spending habits. In the long run I think we will be far more wealthy because of our new saving and spending habits and the overall anti-debt attitude we have.

EDIT: Its worth noting the stock market is literally at the highest point its ever been in history so you are buying into a market that has a high probability of seeing a massive correction. There is a formula financial advisors use to adjust stock market returns based on risk, I don't know how large that adjustment would be right now but my guess is pretty large.

I am going to upset the cart. As someone that has made serious mistakes with both...
This is an Arfcom moment. Get both !

Get the ROTH started. Even if you do not max out contributions. And get the the house paid off. If you brought up the question because you have some extra money available do both.even if you do not have extra money..
Do both.

I can tell you from first hand experience there is nothing more satisfying than not having debt and if things go south later and your income is less you are in better shape. Both financially and mentally. Just MO.

Pay off house.  Then invest.  Some people here understand this.  Or, just bet on black and get it over with.  

It is amazing how a person can stack up money with no mortgage hanging over their head.  I have seen me do it.

Betting on black is a bad idea

You want to bet on banker.

Roth.   You are limited and over a long term it's the best thing going you can always pay down your mortgage but you can't just add whatever money you want to a Roth.

I'd go with Roth simply due to the fact the small contribution limit expires each year.  You can make a 20K payment, but you can't make a 20K catch-up contribution.

Max out the contribution and put the rest into the mortgage.

Do you have any other debt besides the home?

Are there other investment assets?

These are the sorts of things I would consider, but generally if it was my only source of debt I would fund the IRA but keep throwing some extra at the mortgage principal. 

It all comes down to which school of thought you feel more comfortable following as I have researched this for a while.
The majority of articles and threads say to always max out all sorts of retirement funds first and leave the mortgage for last.
Also during my research I noticed many assumptions are made like never losing ones job, unplanned medical expense and so on.

We were in the same boat as you and opted to pay off our mortgage instead. We are now focusing on maxing out the other retirement funds.

Check back in a few months for more feedback as we just did this but my wife has indicated feeling a bit less stressed.
With the instability of her job, not having a mortgage is a relief.
We have also talked about her possibly working part-time instead of full-time due to health issues. This was not feasible with the mortgage and not discussed in any article.

Although paying off the mortgage goes against conventional wisdom, there are numerous of aspects not taking into consideration.

Max out Roth, and use whatever's left to pay down the mortgage.

There's probably no tax benefit where you are to keeping the mortgage, since unless you have a lot of other deductions, you're not paying nearly the amount in mortgage interest compared to the standard deduction.

I would like to hear a follow-up on this, as I'm following your path.  Just not quite yet to the "paid off" part.

pay off house, then when done put what the house payment was and w/e u were going to put into the Roth, into the Roth.

If my principal were <$50k, I'd fund a Roth IRA.  Some people would argue that even with a larger principal, a Roth IRA would be the way to go, but peace of mind has a value of its own.

Roth.  You are limited to a certain dollar amount every year.  When that year goes you can't get it back.   The mortgage you can do any time.  if you regret doing the Roth just sell something and pay the mortgage down is easy.

Here is another way to look at it. If you pay your mortgage that is a guaranteed 5.875% return because it is interest you don't have to pay.

If you invest the money in the stock market you might make 10%, you might make 5%, you might make 0%, you might even lose 5 or 10%.   It is not guaranteed. Over long periods of time the average is up but you never know.

Forget you have a mortgage. Let's pretend you are given a big lump of money and you are given two in investment choices for it. Choice one guarantees you 5.875%. Choice two says they predict around 10% but it could very easily be 5%, 0%, or even lose money. Which would you choose?

I hate debt and would pay my mortgage even if at a low low rate but your mortgage is at a high rate. While I personally would not do it at least I understand the logic of keeping very low interest rate debt and investing instead but a nearly 6% mortgage doesn't leave much room to make a spread.

Like I mentioned it was just done.
We are still moving money around because we are now responsible for paying insurance and property taxes as there is no escrow.
By the end of March we should have a much better idea of what this life style is like and how much more we put toward retirement and how much is going into savings and what our monthly expenses are like as we also started documenting all out going monthly expenses starting in Feb. We decided to start Feb instead of Jan to avoid the Christmas expense.

IMO, pay for the Roth IRA first.
Time is on your side with the mortgage, not with your retirement savings.