Final Word: How To Make The Right Decision
In an ideal world, everyone would have enough money to invest and pay off the mortgage, rather than decide whether to pay down the mortgage or invest. Most of us, however, have to pick and choose where to put our hard-earned dollars.
By deciding to invest when youre still young, you give your portfolio a longer period of time to withstand market fluctuations, compound and grow, which will maximize your returns. For many, prioritizing RRSP investments can be the best option, especially since the resulting tax refund can go toward paying off the mortgage sooner offering the best of both worlds.
Alternative Option: Refinance Your Mortgage And Invest
Maybe you dont have to decide between saving on your mortgage and investing in the stock market.
Theres a third option to consider: Refinancing to save money on your home loan and putting the rest of your cash into higher-yield investments.
You may be able to accomplish both goals paying off your mortgage early and earning returns if you refinance into a shorter loan term.
However, shorter mortgage terms mean larger monthly payments. So you might not have much cash leftover if you do that.
You could also refinance to a new 30-year mortgage with a lower rate.
With todays near-record low mortgage rates, you could still save a substantial amount on your overall mortgage interest and have money left over to invest.
Before refinancing, make sure your credit score qualifies you for a low interest rate and shop around with at least three different lenders to find the best deal.
Know what your financial goals are, explore your options, and make sure youre choosing the best strategy to get you there.
Max Out Your Employers 401 Match
Many employers offer some degree of matching on their 401 plans. This matching is effectively free money, you should contribute at least enough to meet that employer match. If youre currently falling short of getting the maximum possible matching amount perhaps because money has been too tight to defer too much of your paycheck then its time to make it happen. See if you can take advantage of your extra wealth in a way that allows you to up your contribution and get that free money.
Once youve taken care of these three priorities, you can address either your mortgage or your investments. Heres when each option makes the most sense.
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Pay Off Your Mortgage Early
Lets try to make the math easy:
- You borrow $200,000 on a 30-year loan.
- Your fixed interest rate is 3%.
- Your mortgage loan payment is $843 per month.
Now, lets up that mortgage loan payment by an additional $1,000 per month. Using our mortgage payoff calculator, you’ll see that can pay off your mortgage in 10 years and seven months, which would save you $69,952 in interest thats a big number.
Should You Pay Off A Mortgage Before You Retire
If youre like most people, paying off your mortgage and entering retirement debt-free sounds pretty appealing. Its a significant accomplishment and means the end of a major monthly expense. However, for some homeowners, their financial situation and goals might call for keeping a mortgage while attending to other priorities.
Lets look at the reasons why you mightor might notdecide to pay off a mortgage before you retire.
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Are You Paying Into A Pension
If you arent already paying into a pension, you probably should be.
Contributions to pension schemes benefit from tax relief. And if you have access to a workplace scheme, your employer will pay in too, making this a very cost-effective way to save for retirement.
This does also represent a form of investment, albeit a very long-term one, as your money will go into the financial markets.
Here are the best ready-made personal pensions.
You Might Not Want To Pay Off Your Mortgage Early If
- You need to catch up on retirement savings: If you completed a retirement plan and find you arent contributing enough to your 401, IRA, or other retirement accounts, increasing those contributions should probably be your top priority. Savings in these accounts grow tax-deferred until you withdraw them.
- Your cash reserves are low: You dont want to end up house rich and cash poor by paying off your home loan at the expense of your reserves, says Rob Williams, managing director of financial planning at the Schwab Center for Financial Research. He recommends keeping a cash reserve of three to six months worth of living expenses in case of emergency.
- You carry higher-interest debt: Before you pay off your mortgage, first close out any higher-interest loansespecially nondeductible debt like that from credit cards. Create a habit of paying off credit card debt monthly rather than allowing the balance to build so that youll have fewer expenses when you retire.
- You might miss out on investment returns: If your mortgage rate is lower than what youd earn on a low-risk investment with a similar term, you might consider keeping the mortgage and investing what extra you can.
- You need to diversify: Your house is just as much of an investment as whats in your portfolio. And overconcentration carries its own riskseven when its in something as historically stable as a home. Maintaining your mortgage allows you to fund other asset classes with possibly more growth potential.
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Reasons To Invest First
In many cases, investing is the better option. As mentioned, the stock market sees average returns of around 7%. This is over the long term, but thats not an issue if you have time on your side. So if youre young, and you sign a 30-year mortgage, you have plenty of time to pay it off. Unless you have a high interest rate, think about investing. This is especially true if you have a fixed mortgage rate and know that your rate wont increase over time.
If you are already investing with an aggressive asset allocation, you should favor investing more. Aggressive portfolios are often built to help you get gains of 10% or more. Even if you fall a bit below that, your rate of return may be markedly higher than your mortgage rate if the market is doing well. That means you have more to gain by investing your money. Of course, an aggressive portfolio also has greater risk of loss. But if this is the path youve chosen perhaps because you have decades to go until retirement then you hopefully understand that risk.
Investors with a high income value should also consider investing. When you hold an investment for one year or more, you can pay the dividend tax rate on it. This rate is lower than most of the federal income tax rates. That means taxpayers with a high regular tax rate can ultimately save on taxes by building more wealth through investments instead by increasing their regular earnings.
Good Debt Vs Bad Debt
Some people think of all debt as bad, but thats not really the case. Experts refer to both good debt and bad debt. A mortgage lands squarely in the good debt column.
How a loan is secured determines whether its good or bad, says Stanley Poorman, a financial professional with Principal®. A mortgage is secured by an assetyour housewhich gives it an advantage. Personal loans and credit cards are not.
Think of good debt this way: Every payment you make increases your ownership in that asset, in this case your home, a little bit more. But bad debt like credit card payments? That debt is for things youve already paid for and are probably using. Youre not going to own any more of a pair of jeans, for example.
Theres another key difference between purchasing a home and buying most goods and services. Very often, people can pay cash for things like clothes or electronics. The vast majority of people couldnt pay cash for a home, Poorman says. That makes a mortgage all but necessary to buy a house.
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Pay Off Your Mortgage Or Invest This Calculator Will Help You Decide
When interest rates are high or rising, many private investors wonder:Should I pay off my mortgage or invest?
Persistently low interest rates have made larger mortgages affordable.
House prices have soared with lower borrowing costs.
At the same time, the returns from sensible passive investment have trounced the savings from paying down your mortgage.
So, in hindsight, investing in the markets has been more profitable over the past decade than paying off your mortgage early.
Paying off a mortgage will always be worth considering. Debt can be deadly. Owning your home outright is financially liberating.
Very few people who pay off their mortgage regret it.
But this is Monevator. We like to kick things around and sometimes to do things differently.
Should You Pay Off Your Mortgage
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Pay Off Mortgage Or Invest
It can be a bit confusing when it comes to what you should do with any extra cash that you may have.
However, both of these choices pay off mortgage or invest- can help improve your financial situation over time and put you on the path to financial freedom.
Lets discuss the steps to find out which is best for you- it may surprise you whats the right answer for your cash!
The Opposing View: Use Your Home Equity As An Investment Tool
Those more tolerant of risk say homeowners who pay down their mortgages are sacrificing an opportunity to build wealth in their retirement accounts over time.
A 30-year loan comes with pros and cons. On the upside, the payments are low. On the downside, youll pay a lot in interest over the life of the loan. Advisors such as Mork say you should take advantage of the low payment on a 30-year loan. Instead of devoting extra money to paying down the mortgage, fatten up your retirement accounts. In this way, youre viewing the mortgage as a way to maximize savings, rather than as something to be paid off as quickly as possible.
They feel like they have to pay off the house before they retire, says Mork. Thats not always the case.
Thats especially true if you managed to refinance when rates were at historically low levels in 2020 and 2021. If you scored a 3 percent rate, theres no urgency to pay down the debt.
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Should I Prioritize Investing Or Paying Off My Mortgage
One of the most common questions homeowners ask is: Should I invest my money or pay off my mortgage? As you move closer to retirement, this question only comes into sharper focus. Though the answer is truly dependent on your individual circumstances, considering each of these questions should help you decide how to prioritize your goals.
Fine Art As An Investment
Stocks can be volatile, cryptos make big swings to either side, and even gold is not immune to the markets ups and downs.
Thats why if you are looking for the ultimate hedge, it could be worthwhile to check out a real, but overlooked asset: fine art.
Contemporary artwork has outperformed the S& P 500 by a commanding 174% over the past 25 years, according to the Citi Global Art Market chart.
And its becoming a popular way to diversify because its a real physical asset with little correlation to the stock market.
On a scale of -1 to +1, with 0 representing no link at all, Citi found the correlation between contemporary art and the S& P 500 was just 0.12 during the past 25 years.
Earlier this year, Bank of America investment chief Michael Harnett singled out artwork as a sharp way to outperform over the next decade due largely to the assets track record as an inflation hedge.
Investing in art by the likes of Banksy and Andy Warhol used to be an option only for the ultrarich. But with a new investing platform, you can invest in iconic artworks just like Jeff Bezos and Bill Gates do.
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Should I Pay Off My Mortgage Early Or Invest
Home » Articles » Should I Pay Off My Mortgage Early or Invest?
Debt isnt always a bad thing. After all, most homeowners borrow money in the form of a mortgage. Generally speaking, we want to be debt-free and pay off our mortgage as quickly as possible. However, headlines about the stock markets recent performance raise a question: should you invest your extra savings? Or pay down your debt, like a mortgage, faster than your minimum payment alone?
With todays mortgage rates hovering around 3 or 4% and even lower, they are nowhere near the 10% or even 15% they once were, and the stock market is looking more and more attractive. Lets look at some of the pros and cons of investing vs. paying off your mortgage early, and see which decision best suits your needs and lifestyle.
Here’s How To Save Up To $700/year Off Your Car Insurance In Minutes
When was the last time you compared car insurance rates? Chances are youre seriously overpaying with your current policy.
Its true. You could be paying way less for the same coverage. All you need to do is look for it.
And if you look through an online marketplace called SmartFinancial you could be getting rates as low as $22 a month and saving yourself more than $700 a year.
It takes one minute to get quotes from multiple insurers, so you can see all the best rates side-by-side.
So if you havent checked car insurance rates in a while, see how much you can save with a new policy.
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Build An Emergency Savings Fund
According to a survey by CareerBuilder, 78% of Americans live paycheck to paycheck. Even 9% of people with incomes of $100,000 or more live paycheck to paycheck. If you dont have any savings, you can find yourself in a very difficult position should something unexpected happen. Thats why its a good idea to build some emergency savings. Most experts will recommend a liquid, safe emergency fund covering three to six months of living expenses. The best savings accounts can even give you some decent interest on your fund without exposing it to market risk.
After youve paid down any high-interest debt, you should start an emergency fund . If that still doesnt get you to three to six months of expenses, set up a plan to start contributing regularly. Our simple guide to making a budget can help you find room in your budget for these regular contributions.
As you start investing more or making extra mortgage payments, remember to maintain this savings fund. If you dont always have a liquid fund that you can access at any time, youre exposing yourself to risk. And as your situation changes, you will need to adjust your savings. For example, you should increase how much savings you have on hand as you have kids . So if you dont have enough in savings, forgo investing and extra payments in favor of growing your savings.
Buy What You Can Afford
Yes, it sounds obvious. Buy a home that fits your budget. But the reality is, when it comes to buying a home, most of us struggle. On one side, we want our dream home. On the other is the desire to be fiscally smart. Quite often, its a trade-off. If you focus on buying within your budget , then youre less likely to dip below the 20% down payment and more likely to stick to your plan of paying off the debt sooner.
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Should You Pay Off Your Mortgage The Answer May Surprise You
Your financial priorities are different than your neighbors or your best friends or your parents.
Take a home mortgage, for example. Plenty of people are happy with paying 15 or 30 years on a mortgage, while others are anxious to get rid of any debtincluding their home loanas soon as possible.
Which is right? As with most things related to money, its complicatedand more personalthan a single choice.
Heres what to consider if youre thinking about when to pay off your mortgage.
Reasons To Prioritize Investing First
Some homeowners would rather put every spare penny into an investment rather than paying down their mortgage debt. Their rationale is that the return on the invested dollar is greater than the guaranteed return youd get for paying off your mortgage.
Take for instance a homeowner with $50,000, deciding whether to invest or pay their mortgage. They could make a lump sum payment towards their current mortgage. The additional $50,000 would reduce the principal borrowed and this reduces the overall interest paid. If the mortgage was $450,000, the homeowner locked in their mortgage rate at 2.85%, and if they made no other accelerated or lump sum payments, this additional $50,000 would reduce the overall amount of interest theyd pay on their mortgage by $44,880. . This is like getting a guaranteed return of 2.8% on your invested money. Compare this to high-interest savings accounts that pay between 1.5% and 2% or GICs that pay 1.95% or 2.25%, and this return looks good.
But if youve been a disciplined saver or if you have a pension you can count on in retirement, it may be possible to take the $50,000 and invest it in riskier investments for a possible better return.
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