by: Stephen L. Nelson, CPA
Early mortgage repayment looks on paper at least like a wonderful deal. If you have a typical mortgage and you are near the beginning of the mortgage term and make an extra $25 a month in principal payments, you could potentially save $25,000 in interest over the life of the loan.
Note: The exact amount of early repayment savings depends on the loan, but, in general, the apparent savings are astounding.
In spite of the superficial profit that seems to come from early mortgage repayment, it?s often not a good decision. The tragedy here is if you would have used that $25 a month to boost your individual retirement account, or IRA contribution, you would end up with $50,000 in your IRA account. If you would have used the $25 a month to make extra contributions to your employer?s 401(k) plan, you might have easily ended up with $75,000 in a 401(k) account.
The reason for these discrepancies is simple. In effect, when you calculate the interest you save by early mortgage repayment, or the interest you make by investing in an IRA or a 401(k), you are making a compound interest calculation. Any time you compound interest over long periods of time, the numbers eventually grow large. But the most important factor driving the interest rate compounding calculation is the interest rate. The larger the interest rate, the faster the compounding and ultimately the larger the final value.
If you can prepay a mortgage that charges 6% but invest in an individual retirement account or 401(k) account that will pay 8%, mortgage repayment is actually a terrible idea. And, unfortunately, very small differences in interest rates ultimately produce very large differences in the final compounded values.
Although early mortgage repayment is a technique that many financial writers who don?t know better recommend, you are typically better off using the money you would have used for early mortgage repayment for additional individual retirement account or 401(k) contributions. The one scenario in which you could save money through early mortgage repayment is when you have already taken maximum advantage of these other investment choices and are still looking for some other place to ?save? additional money.
About The Author
Stephen L. Nelson, CPA Redmond WA accountant Stephen L. Nelson, CPA, MBA is the author of Quicken for Dummies, QuickBooks for Dummies and more than 100 other books as well. He can be reached at http://www.stephenlnelson.com
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Renting vs. Buying: 7 Financial Facts
Renting vs. Buying: 7 Financial Facts
by: J Wynia
Fact: You are going to pay for a place to live. Period.
There is no free lunch and paying for a roof over your head is going to be part of your budget for a very long time. Given your needs (either just you, a partner or a larger family), there is a certain amount of space you need. For a family of 4, that means 3 bedrooms for at least 18 years and likely closer to 30. You are either going to spend that paying to live in someone else's home or your own.
Fact: Rent and mortgages are closer in monthly payments than you think.
Average 3BR rents in my metro area (Minneapolis) are $900-1000/month with many closer to $1200. That's for a rented condominium, not a house. In my metro area, there are currently over 250 condos and townhomes (equals owning the same thing you rent) under $1000 a month in payments. There are another 853 single family homes (an upgrade from apartments) under that...
Renting vs. Buying: 7 Financial Facts
Ira > Renting vs. Buying: 7 Financial Facts
A Guide to IRA Accounts
A Guide to IRA Accounts
by: John Mussi
An Individual Retirement Account (or IRA) is a retirement plan account that provides some tax advantages for retirement savings. There are a number of different types of IRA accounts, some being employer provided plans and others you set up yourself.
Traditional IRA
In a traditional IRA, the money is deposited before being taxed. It accumulates tax free on earnings until being withdrawn at retirement, at which point the money is taxed.
Since the money is contributed before taxes, you take a tax deduction for it (some exceptions), then let it grow until retirement. So, when you retire (presumably in a lower tax bracket) the money is taxed.
The main restriction on this one is that your annual contributions are only tax deductible if you're not covered by a pension, 401K, or any other retirement plan where you work. You can contribute only certain amounts per person into a Traditional...
A Guide to IRA Accounts
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Taking Full Advantage Of Your 401(k) ? How Well Do You Know Your Plan.
Taking Full Advantage Of Your 401(k) ? How Well Do You Know Your Plan.
by: Simon Fox
Taking full advantage of your 401(k) plan today can help you achieve financial goals sooner, and provide enough income for a comfortable retirement. For most working people, Social Security checks alone will not be enough to maintain the standard of living they are used to, once they are no longer working. If you are lucky, your employer offers a 401(k) plan which, if used wisely and to the fullest advantage, can provide you with additional income for your golden years.
401(k) plans differ greatly depending on the employer who sets the rules. The only way to get the most out of the plan is to get to know it and make educated choices.
Things you should know:
- What is the maximum percentage of your salary you are able to contribute (see also 401(k)contribution limits set by IRS)?
- Is your employer matching the contributions? If yes, what is...
Taking Full Advantage Of Your 401(k) ? How Well Do You Know Your Plan.
Ira > Taking Full Advantage Of Your 401(k) ? How Well Do You Know Your Plan.
How To Transfer A Retirement Account
How To Transfer A Retirement Account
by: Jakob Jelling
Make sure you know where you intend on moving your money in advance!
As you probably know, an individual retirement account requires that you decide where your money is going to be invested in order to work with the retirement account.
Essentially this is called a "custodian" for your investments.
You should generally chose a safe custodian - some of the most common ones are mutual funds, savings accounts, and bonds.
While you should definitely be careful as to which custodian you choose for your retirement account, don't worry!
You are not stuck with the same investment until you retire.
However, unlike a normal investment, you should keep in mind that you are only allowed to transfer or "roll over" your retirement account once a year.
Also, there are some very specific rules that you need to follow. It is generally a good idea to find...
Ira > How To Transfer A Retirement Account