Paying off Home instead of IRA?

ZServe · #1 05-07-2006, 01:15 AM

I am 26 years old and am starting to look to buy my first home. I have been self employed for the past 2.5 years and have no retirement plan set up. On the bright side, I have ZERO debt and approx. $70,000 in cash saved. I know the following plan is not optimal due to tax benefits of IRA's and getting the break on your mortgage interest, but I have a very strong aversion (HATE) for debt and if I am only making a small mistake by doing this it will be worth it for my own peace of mind.

If I buy a home for $150,000 putting 50k down with a 100k mortgage, and for the next 5-10 yrs throw as much cash as possible at getting the mortgage down. Hopefully the home will be paid off in 7-10 years at which time I can sell for $X. I then use $X as a down payment towards a bigger and better house, where the cycle would start over.

Hopefully by the time I am 60 I will be living in a very expensive house fully paid off. I can then sell it for whatever it is worth, move into a more modest home, and have the rest to live on.

I know there are a million variables such as marriage, kids, the RE market, etc. but in general how stupid is this plan? I really like to keep things simple in life and if I dont have cash to pay for something then I dont buy it.

Any comments are very much appreciated!

James Boston · #2 05-07-2006, 02:52 PM

Your plan is okay, but you left out some information that really matters, mainly income.

Here's my generic answer. Go ahead and do everything you can to pay off the house, while still putting some savings aside. If you're making good money, you can max out your IRA and still pay some extra on the mortgage principle.

chardog · #3 05-07-2006, 03:13 PM

Something to think about.. I'm a constant listener of Bob Brinker's weekend financial talk show that is syndicated across the country. Almost every weekend he has a few callers that have come into significant new money and want to know if they should use it to pay down their mortgages. His first question is always "What is your loan's interest rate?". Over the past couple years the answer is usually 6% or lower. Bob then explains that the "real" cost of the money you have borrowed is the loan's interest rate minus inflation (you will pay back the loan with cheaper dollars over time due to inflation). Very rarely has he advocated to pre-pay a mortgage in the current interest rate enviorment.

Given your example lets say you got a $100k 15yr fixed mortgage at 6% and inflation is currently at 3.4%. The real cost of the money you have borrowed is only 2.6%. Surely you could invest for a better return elsewhere rather than pre-paying the mortgage.

ElaineMonster · #4 05-07-2006, 06:15 PM

My thoughts are:

1. What will you do if you find Ms. Right in the next 5-7 years (before you sell the house) and she doesn't want to move into your house or has a house of her own that she can't afford to sell yet?

2. Have you considered the possibility of both? What I mean is put the mone in a retirement account to get the tax benefits and they borrow against the money in the account? You would likely have to pay a penalty to borrow from it but that penalty could be less than the saved taxes, offering you a net profit and the best of both worlds.

James Boston · #5 05-07-2006, 06:32 PM

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What will you do if you find Ms. Right in the next 5-7 years (before you sell the house) and she doesn't want to move into your house

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I don't want to hijack this threas too much, but that seems like a pretty invalid point. If a guy has a house nearly paid off, and plans on up-grading soon, a future wife better have a damn good reason not to move into that house. "I don't like it" doesn't count either. Things like this will probably be what keeps me from getting married.

shark6 · #6 05-07-2006, 10:55 PM

Having that much money at 26 is quite an accomplishment.

I think your plan is laudable, but I would recommend a balanced approach between paying of a mortgage and investing for retirement. Basically, don't put all your eggs into the real estate market.

A general rule of thumb is to save 10% of your pre-tax earnings for retirement. I would save that then put any extra towards your mortage. I also have an aversion to debt, and this is the approach I've taken.

Also, a large downpayment has other benefits such as being able to negotiate a lower mortgage interest rate and paying less in fees to close the loan.

ElaineMonster · #7 05-08-2006, 10:23 AM

[ QUOTE ]
[ QUOTE ]
What will you do if you find Ms. Right in the next 5-7 years (before you sell the house) and she doesn't want to move into your house

[/ QUOTE ]

I don't want to hijack this thread too much, but that seems like a pretty invalid point. If a guy has a house nearly paid off, and plans on up-grading soon, a future wife better have a damn good reason not to move into that house. "I don't like it" doesn't count either.

[/ QUOTE ]

You know how we all instintively think that people who get married and then both partners move into one partner's parents' house is a bad idea? Or how we worry about people who just met and she gets pregnant 2 months later and they get married? It's the same thing. Why put your relationship in a dificult situation unless you have to?

Relationships stand a better chance of long term success if the partners meet on neutral ground rather than if one moves into the other's space.

Besides, she could have very valid reasons - a place of her own she doesn't want to sell, his home is far from her work and friends... In general, women are less willing to move away from friends and family than men are, but there are obvious exceptions [img]/images/graemlins/wink.gif[/img]

I'm not saying the OP shouldn't buy a home. He probably should. But if he's anticipating MAJOR life changes within the time he must live in the home, he needs to think about how he will deal with those changes.

(Basically I'm saying he should choose a house he loves and thinks is easily resellable rather than a house he can imgaine adding a wife and family to).

[ QUOTE ]
Things like this will probably be what keeps me from getting married.

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Ya think?

James Boston · #8 05-08-2006, 12:37 PM

I understand what you're saying, but still don't think it makes sense. (You make sense, the idea doesn't) If I've spent years climbing to a certain level of finacial stability, I'm not going to forego that just to appease a woman. That would have nothing to do with my, presumably strong, feelings for her. It just doesn't make sense to throw money away so she could be closer to her friends, keep a house of a lower value, etc... There are alot of variables here, so it could easily workout to be a situation where I felt like moving would make the most sense. Still, I would never get rid of a home I had almost paid off, and the two of us living there presented no real problems, just because "she doesn't want to live there." Then again, I probably wouldn't be that into a girl who expected me to live my life based around her conveniences.

ElaineMonster · #9 05-08-2006, 04:11 PM

Why do you assume her house would be of lower value?

James Boston · #10 05-08-2006, 10:43 PM

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Why do you assume her house would be of lower value?

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This whole thing is hypothetical. That is an example of a reason I would consider bogus when being told I need to sell my hypothetical house. Of course her hypothetical house could be worth more. In that case, I would think the most financially reasonable thing we, as a married couple, should do would be to sell my house to pay off hers, where we would then live.