Dear Dr. Don,
I am 27 years old with $20,000 in cash savings and $30,000 in retirement funds (401(k) and Roth individual retirement account), and I have $121,000 remaining on a new 30-year fixed-rate mortgage at 3.625%. I bought the home this year, after putting down 20%.
If I have an extra $1,000 or $2,000 at the end of this year, would it be better to pay down the mortgage principal or invest the money in my Roth IRA to max it out? I invest in an 85/15 mutual fund.
– Jason Juncture
Fully fund the Roth IRA. If you can reasonably expect to earn more after-tax on your investments than you pay in after-tax interest on your home loan, it’s better to invest the money than to pay down the mortgage.
You have a great rate on your 30-year fixed-rate mortgage. Why rush to pay it off when you can put the extra cash in the Roth IRA, keep that money invested and be able to spend out of the account tax-free in retirement?