I have $5000 that I can invest in the home we are buying by paying down the principle by that amount after we close thus reducing the 30year loan by a few years. P & I on the house is $750/mo. My other option is to invest the money in a Roth IRA and tie it to a index fund perhaps. I'm trying to decide what will have the better benefit over 20 years when I retire - fewer years on the house payment or the return gained from the $5k Roth IRA. The $5k is what remains from the sale of our house after paying 20% down and closing costs on the new house.
Thanks for your perspective.

Assuming that you don't have any other debt and your income is within limits for full contribution to Roth IRAs, I would put $2k in a Roth for yourself (2001 full contribution), $2k in a Roth for your spouse (2001 full contribution), and use the remaining $1 to pay down the mortgage. If you ever have financial difficulty in the future, the contributions to the Roth IRAs can be withdrawn without any penalty, which makes this money much more liquid than home equity.

If you have any high interest debt, I would pay that down first.

Best of Luck,

Teresa

I have $5000 that I can invest in the home we are buying by paying down the principle by that amount after we close thus reducing the 30year loan by a few years. P & I on the house is $750/mo. My other option is to invest the money in a Roth IRA

By prepaying the mortgage you'll probably get about a 4-5% return (depending on your mortgage APR and your income tax rates) on your money since you're reducing tax deductible interest payments.

Investing in equities via a mutual fund in a Roth IRA (with tax free withdrawal of both contributions and gains) will likely, over the long term, produce twice those returns (based on the long term average return on equities of about 11%).

I'd agree with the earlier post, which suggested putting $2,000 each into Roth IRA's for yourself and your spouse, then perhaps using the remaining $1,000 towards debt repayment. You might even consider saving the $1,000 towards additional Roth contributions in 2002.

There is legislation (Portman-Cardin) on Capital Hill that, if approved, will increase the maximum contribution limits for IRA's. It has wide support in both the House and Senate, but has in the past been tied up with more controversial budget and tax issues. Bush will surely sign it if it reaches his desk, but he seems to have other priorities at the moment. You might want to contact your Senators and Representatives to voice your support.

http://www.passpensionreform.org/

Thanks - great info. and ideas. I'll have to check the income limits to the Roth.

Again, great advice and insight. I do appreciate your response.

By prepaying the mortgage you'll probably get about a 4-5% return (depending on your mortgage APR and your income tax
rates) on your money since you're reducing tax deductible interest payments.

Investing in equities via a mutual fund in a Roth IRA (with tax free withdrawal of both contributions and gains) will likely, over
the long term, produce twice those returns (based on the long term average return on equities of about 11%).


you should also consider the appreciation of the home as "return on your investment," in addition to interest payment savings.

although i couldnt tell you exactly what your home's appreciation value is ;-)

i also agree that roth IRA's are great retirement savings vehicles.

just my 2 cents

'zila

you should also consider the appreciation of the home as "return on your investment," in addition to interest payment savings.

But the home will appreciate at the same rate, whether they choose to prepay the mortgage or not, and thus it shouldn't affect the Roth vs. mortage prepayment decision.

I read an article here at the Fool recently (don't know how old it was) that compared two neighbors, one of whom prepaid his mortgage each month and the other invested the same amount. I found the article very helpful. I've searched and searched and can't for the life of me find it now. Does anyone else know the article I'm referring to?

Jan

Yes, I saw the same article last week in one of the Fool weekly news letter email updates. It was very good and it comfirmed what I have been feeling and what I have been told here