Current Events > Pay off mortgage faster or max 401k?

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My husband and I are at odds here so asking what people think. Were nearing the end of paying off a big loan we took and now want to think of how to best grow our savings with the extra funds well have.

My husband wants to refinance to a 15 year mortgage. Wed save a crap ton on interest and rates are crazy low now. But I think were better off maxing our 401ks because I think long term we stand to gain more than what wed save on interest. But he doesnt entirely trust that our 401ks will be worth anything by the time we retire (17 years for him and 30 for me). Were not in the position to do both.

What do you guys think is the better option?

i dont fucking know

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Well, I think you're probably correct in a dollars and cents perspective, but imo there is a certain psychological benefit to not being indebted even if you have no plans to move or sell in the future

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What the fuck are either of those things.

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You can probably do the math yourself and see that way. Depending on current mortgage interest, good chance the 401k is better math wise.
But what balrog said is probably going to be important.

People just like the peace of mind of knowing their shit is paid off and it's hard to put a value on that.

I personally favor the 401k most of the time.
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Pay off your house. That way, when you do retire, it's one less bill to worry about.

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Refinance but get a 20 or 30 year mortgage, and keep paying the same you do now.

Put the excess in the 401k.


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bitcoin

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Obviously your goals and situation dictate this but heres my generic off the cuff advice.

Accelerate your mortgage payoff to open up the equity in your home. That equity can be borrowed against down the line if needed, for costly remodeling or other large expenses, and borrowing is always cheaper than being forced to take out of retirement.

Additionally as your principal balance on your mortgage shrinks you can reach a point where you can take out an equity line that itself can be used to payoff the primary mortgage. The minimum due is interest only on those so you can pay pretty much anything you want and put the rest in retirement (which youll be more comfortably close to).

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Hard to say without knowing the actual interest rate numbers. If your employer is matching your 401k contribution, that should generally be your first goal, up to what they match. After that, it depends on your interest rates, but probably 401k is still better, unless you have wicked high mortgage rate.

You should also check r/personalfinance, I guarantee someone has asked a similar/identical question.

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Refinancing to a 15 year may save some interest, but i think it is far more important to worry about cash flow. You can always pay off a 30 year mortgage in 15 years, but you cant pay off a 15 year mortgage in 30 - this matters a lot if you lose your job or otherwise take an income hit

As far as paying down mortgage vs contributing more to 401(k): objectively, you should be maxing out the 401k first. It will leave with more money long term.

That said, i know i get a great deal of satisfaction in paying down my mortgage faster so i split it. It is still a good use of money, even if slightly less optimal. Just dont do zero 401k.
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Chances are you'll come out ahead investing now since I'm sure your interest rate on your mortgage is quite low. I know some people prefer paying off their house early, though, since that's one less debt hanging over their heads.

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Weve discussed just paying off our 30 year mortgage faster but the 15 year one has a better rate so thats why were thinking of it. Ours is currently 3.875 and a 15 year one is 2.75. We also have a home equity line and thats what were paying off currently (we borrowed about half of it to pay off a loan that was really the down payment of the house so technically its been used to pay off our mortgage).

We would have enough cash leftover even if we went with 15 year. So if one of us lost a job wed be able to make it work.

His company matches 100% up to 6% so thats what he puts in. Mine matches very shitty so I havent put much in while we pay off the loan.

I mean we could do a mix of both, 15 year mortgage and pay more into 401ks but I feel like long term theres more money in 401k investing. I get what hes thinking though because hed be retiring by the time we finished the 15 year loan and we wouldnt have to worry about a mortgage anymore.

I'm in the process of closing out on my first house purchase. I opted for 10% down and a 30 year mortgage (I'm single). I plan to make additional payments to get the equity up to 20% asap so I no longer need mortgage insurance.

Once that's been done, I plan to increase my 401k contributions since the mortgage will be static. The more I contribute the more I'll benefit.

401ks can't be touched in the event that you have to declare bankruptcy so to me having a larger 401k give me more peace of mind.

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Will_VIIII posted...

I'm in the process of closing out on my first house purchase. I opted for 10% down and a 30 year mortgage (I'm single). I plan to make additional payments to get the equity up to 20% asap so I no longer need mortgage insurance.

Once that's been done, I plan to increase my 401k contributions since the mortgage will be static. The more I contribute the more I'll benefit.

401ks can't be touched in the event that you have to declare bankruptcy so to me having a larger 401k give me more peace of mind.

Congrats on your first home!

Cleo_II posted...

But he doesnt entirely trust that our 401ks will be worth anything by the time we retire (17 years for him and 30 for me).

show him the 10% worst case monte carlo outcome and its associated growth rate

then show him that even that rate is higher than your mortgage rate

and then point out that the actual savings for the mortgage path isn't the rate but the rate delta

you're entirely right and he's wrong

also you could probably refi to a new 30-year for free at a somewhat lower rate than your current. ask your direct lenders.

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Cleo_II posted...

Congrats on your first home!

Thanks!

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You'd better off selling the house and buying a new one if 15Yr is what interests you.

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Have you looked into how much extra you'd need to pay on your 30-year to match what you'd end up paying for the 15-year? There's probably a calculator out there somewhere that would determine this. It wouldnt lower your interest but I'm assuming the 15-year would still have higher monthly payments even with the lower rate.
You also need to ask yourself if it's your forever home. Cuz if it's not, then you can also factor in the value (and guesstimate projected value) of your home as well.
There's also a lot to be said about the peace of mind on being debt free.

That said, and generally speaking, you'd want to also max/match whatever contributions your employer does pay into your 401 (if you can spare it).

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JustMyOpinion posted...

401k unless you have a crazy high rate on your mortgage in which case refinance and then do 401k.

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A couple of questions worth considering:

1. How many years do you have left on your mortgage given your current payment rate?
2. Do you plan on moving anytime soon (as in sometime in the next 10 years) for any reason?

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Throw all the money at the house then throw all the money at the 401k

Having a paid off house feels better than a 401k maxed tbh

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Sackgurl posted...

show him the 10% worst case monte carlo outcome and its associated growth rate

then show him that even that rate is higher than your mortgage rate

and then point out that the actual savings for the mortgage path isn't the rate but the rate delta

you're entirely right and he's wrong

also you could probably refi to a new 30-year for free at a somewhat lower rate than your current. ask your direct lenders.

Thanks for the suggestion! Im not super financial savvy but I know my husband is big on numbers, spreadsheets, etc. So I think well need to sit down and run all the numbers.

Im fairly good with our budget though. Ive accurately tracked our debt pay off for the year. Estimated wed be done by this December and then we got an unforeseen big payment last July. Now were tracking for January. So my estimates were accurate. Not bad considering I made the budget last year.

iirc you have a math background so you can probably make a compelling argument to him on the subject

basically most financial planning sites/tools have 'median outcome' and '10% worst case scenario' predictions for your savings growth over time

even the worst case scenario predictions tend to have rates >3%, but the choice here isn't over 3% interest, but rather about 1.5% interest

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Sounds like something you should be asking a financial planner instead of CE.

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JustMyOpinion posted...

401k unless you have a crazy high rate on your mortgage in which case refinance and then do 401k.

This

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Mortgage interest is tax deductible. 401K investments turn money into more money.

Always max 401K first unless you can't actually afford your housing payments.

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Im all for 15 year mortgages and paying off faster. Wisest decision Ive ever done.

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I vote for maxing out the 401k >_> The mortgage debt isn't a huge thing imo, you can always put some extra money into it here or there to help pay it off sooner, but I don't see the equity building as quickly as compounding high rates of return in an investment account.

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401K of course. Assuming you get a match.

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Investing is always the better idea unless you're paying more in interest on your mortgage than your average ROI on your investments. The reason being the compound interest on todays investments will be worth a hell of a lot more in 30 years than the same amount invested in 15 years.

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3PiesAndAFork posted...

Investing is always the better idea unless you're paying more in interest on your mortgage than your average ROI on your investments. The reason being the compound interest on todays investments will be worth a hell of a lot more in 30 years than the same amount invested in 15 years.

In other words, focusing on the mortgage is like voting for Nicole and Azan, but focusing on the 401(k) is like voting for Anna and Mursel.

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Cleo_II posted...

My husband wants to refinance to a 15 year mortgage. Wed save a crap ton on interest and rates are crazy low now. But I think were better off maxing our 401ks because I think long term we stand to gain more than what wed save on interest. But he doesnt entirely trust that our 401ks will be worth anything by the time we retire (17 years for him and 30 for me). Were not in the position to do both.

Can't you just refinance your current mortgage. If it's 20 or 30 years and still get a better rate and then you can still save for your 401ks. All I want to say is the economy in the worst of times STILL always recovers no matter what and continues to reach highs. It'll drop but it'll always go up. That's why vanguards exist because they know that and why they're good retirement vehicles.

Defintiely DO watch this short clip by PBS Two Cents. They make short financing videos so people can understand finances better and what to do.

https://www.youtube.com/watch?v=ao6f5ZT9MfE

They're good people and really informative. I wish they had more views, but I think a lot of people don't feel like finances are something to be educated about. But that video certainly touches on your husband's concern about his 401k being worthless in the future.

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Honestly, this is something you guys can calculate the numbers on. Figure out what the returns are on your 401ks and what they'll be predicted, and see how much you save by refinancing and not investing in your 401ks. See how much you win out. You can even add a number to how much better you guys feel about finishing the mortgage off faster too.

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badjay posted...

They're good people and really informative. I wish they had more views, but I think a lot of people don't feel like finances are something to be educated about. But that video certainly touches on your husband's concern about his 401k being worthless in the future.

two cents are awesome! i am glad they found sponsors.

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How much would the mortgage drop? A drop of 1% is usually the lowest I would recommend.

Elmer_Glue posted...

How much would the mortgage drop? A drop of 1% is usually the lowest I would recommend.

Thats a kind of weak rule of thumb

Higher value mortgages, especially early in the term, can save a lot of money even with a .25% drop

Theres no reason not to just do the math, hundreds of mortgage calculators out there will tell you the payments + interest saved over the life of the loan for whatever rate you want
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What other debts do you have?

The fact that youre able to max out the 401k tells me youll be fine regardless. Id pay off the mortgage faster for peace of mind. Theres obviously more certainty in 15 years than 30, plus theres not much growth anticipated for the stock market in the next few years.


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If paying if your mortgage would lead to you taking on a new financial expense (car/luxury item/remodel), then 401k.

I'm looking to pay off my student loans but the point is to free up money to buy a new car and start to look into home ownership. So I'm also putting as much as I'm comfortable into my 401k.

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Flockaveli posted...

What the fuck are either of those things.

This guy doesn't know what a mortgage is.

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