Whether you have some extra money left over in your budget each month or experience a bit of a windfall, you may want to make the most of the extra cash you have on hand. Which is why instead of buying a new car or taking a luxurious trip, you may be in the midst of a hot debate about whether or not to pay off a mortgage or invest. Being mortgage-free sounds pretty sweet, but so does benefiting from investments and enjoying the power of compound interest for decades to come.
Is it better to pay off a mortgage or invest? When you're trying to decide whether to invest or pay off your mortgage, it's all about opportunity cost. Consider how much money you currently have saved and how quickly you may be able to pay off your mortgage versus how much money you could potentially make by investing in something else.
Those looking to earn more from their savings can benefit greatly from investing, but those who prefer to pay it safe will likely prefer to make progress on paying off their mortgage loan.
If you’re thinking of hustling to pay off your mortgage early, here’s some pros and cons to keep in mind.
If you have extra money in your savings that you want to make the most out of, you may also consider investing it instead of making extra mortgage payments.
Whether or not you should pay off your mortgage early and invest the money instead depends on your financial goals, personal circumstances, as well as your preference for risk.
Before you pour your money into a mortgage pay off or extra investments in any form, think about whether those funds wouldn't be better served elsewhere. You should only consider paying off a mortgage or investing if
Whether or not the house is your forever-home can help you decide whether or not you should pay off the mortgage or invest the funds instead. If you are not planning on living in your current home for a long period of time, it may not be beneficial to pour all of money into the mortgage payoff. If you are settled in and have a fixed mortgage rate with a long loan term, then investing instead could be something to consider.
As real estate property, your home is already a low-key investment, one that can help you build your net worth and pass on to future heirs. Home prices also tend to appreciate, too, even during times of inflation. Going back to 1990, home prices have had an annual appreciation of about 4%, and it has continued to increase in recent years, and even more so for in certain hot markets.
On the other hand, the historic annualized average rate of return for the S&P 500 is much higher, at about 12%, which means you could earn more by investing. Individual stocks and alternative assets could yield even higher returns, but may be more volatile. Knowing your appetite for risk is integral to how you approach investing, or whether or not you should at all.
Paying off a mortgage is easy; investing by contrast is hard. Higher risk investments, like stocks, have the potential to yield a higher investment on returns. Other lower-risk assets like bonds or CDs (certificates of deposit) are less risky, but may not net you as much profit. If you decide the invest instead of paying off your mortgage, you can always diversify your portfolio so you have a mix of both assets. Unless you have experience playing the stock market, you may want to hire a financial planner to help you decide what assets to invest in.
Another way to have it both ways is to refinance your mortgage to a lower rate or better terms. With a lower monthly payments, you can use any potential savings towards investments of your choosing. One easy way to do this is to simply funnel more money into your retirement account like a 401(k) or IRA.
When weighing whether to pay off a mortgage early or invest elsewhere, bear in mind that some combination of both would likely yield greater financial stability than either choice alone. Again, consider speaking with an experienced financial advisor who can help guide you through this decision process so that you can make an informed decision about what makes sense for your own personal circumstances and goals.
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