brp@ihuxm.UUCP (B.R. Priest) (03/27/84)
Ok investors- What do you think? Would it be better to pre-pay part of my mortgage (12.9%-no pre-payment penalty) thereby saving interest payments or better to open an IRA? Ben Priest ihnp4!ihuxm -- !ihuxm!brp
halle1@houxz.UUCP (J.HALLE) (03/27/84)
Only you can decide if it is better to prepay. Is the post tax return on the money you would invest more or less than the post tax cost of the interest? The question is not that simple. You really should calculate the present worth of the money after several years to take into account the interest you'd pay for several years and the earnings for several years.
wetcw@pyuxa.UUCP (T C Wheeler) (03/27/84)
This to the line There are two VERY good reasons why you do not want to pre-pay your mortgage instead of investing in an IRA. First, your interest payments to your mortgage are tax deductible. Pre-pay your mortgage and you lose a hefty deduction. Second, an investment in an IRA is also deducted from your GROSS income. Not taking advantage of this deduction will increase your taxes. Remember, you do not pay taxes on an IRA's income until after you begin to take that money out of the IRA. Thus, an investment in an IRA is probably the best deal us little folk will come across in our lifetimes. Pre-paying a mortgage may sound good because you won't have as much tp pay out every month, but, in the long run, your tax bite will eat up your money. Look at it this way, mortgage=12.5%. IRA investment=9.5% Difference=3.0%. You pay no taxes on the 9.5%, yet you get to deduct the 12.5% from your income. You are effectively out only 3.0% on your payments, yet it helps reduce your taxes. Now, depending on your tax bracket, you could be making money here. As your income increases, the offsetting advantages of an IRA and mortgage payments vs. taxes will become more apparent. Go for the IRA. Cutting off 2000 or 4000(if married and wife works) is a big chunk that you do not have to pay taxes on. When you begin to take money out of the IRA, you will probably be making less money or retired so that you will be in a lower tax bracket, thus will not have to pay the full frieght on the money you saved. Remember, you only pay taxes on that amount that you take out of an IRA. The rest is still untaxed. T. C. Wheeler
johnl@haddock.UUCP (03/29/84)
#R:ihuxm:-94000:haddock:11900006:000:592 haddock!johnl Mar 28 15:39:00 1984 T. C. Wheeler is right. Prepaying your 12.9% mortgage would be a poor idea. At this point it's not hard to get an IRA vehicle that pays over 12% (at Merrill Lynch, for example, who lay it off on some anonymous bank.) If we assume that the interest rates are the same, which they would be nearly, you get to keep all of the IRA interest (until you withdraw it in several decades) while Uncle Sam makes up half of the interest you pay on the mortgage. Putting it in an IRA almost doubles your return, even before you take the $2000 deduction for the IRA contribution. John Levine, ima!johnl