Paying off mortgage vs investing the money
To use our website, we recommend using the latest version of Microsoft Edge, Chrome, or Safari. Should I prioritize investing or paying off my mortgage? Invest 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.
How comfortable are you with risk? For many homeowners, it comes down to tolerance for risk. Chipping away at your mortgage is traditionally a safer move. Consider your comfort level and how conservative you want to be.
This is because your money is typically going towards the interest on the loan, not the principal itself. This means that any extra payments will reduce the total amount of interest owed over the course of the entire loan. Are you paying off your mortgage with savings? Now back to our regular analysis.
Other Considerations for Your Situation 1 You have other higher interest rate debt If you're carrying other high interest debt like credit cards, focus on these first. There are investment questionnaires online you can take or consult with a financial advisor to help you find a portfolio that will let you sleep at night.
Selling your stocks in the event of an emergency may mean selling at a loss. Refinancing can have the benefit of lowering your monthly payment and reducing your total interest paid. This can be a great move for you financially if the interest rate drop covers your refinancing fees.
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Retirement accounts such as the k , Roth IRA, and Traditional IRA accounts are tax exempt while the money is invested, making them a great place to compound your money tax-free. If your investment goal is retirement accumulation , the tax treatment of retirement accounts is a reason to consider investing in the market rather than paying down your mortgage.
We're going to interrupt our analysis for a moment for a public service announcement. If your employer matches your contributions in a k or you're investing in another retirement plan that you have not maxed out, your choices are easy.
Max out the matching plan first. Now back to our regular analysis. In other words, just as taking on more risk can magnify investment gains, it can also lead to more losses, meaning the market risk is a double-edged sword. As a result, investors should have realistic expectations as to what they can earn in the market. Special Considerations Before deciding to pay off a loan early, it's important to consider the interest rate, the remaining balance, and how much interest will be saved.
Borrowers can use a mortgage loan calculator to analyze the amortization schedule for their loan. Also, how that money could be used versus paying off the mortgage should be considered. For example, some of that money could be used to establish an emergency fund, save for retirement, or pay off credit card debt with a higher interest rate. It's also important to consider that mortgage interest is tax-deductible for many homeowners, meaning the interest paid reduces your taxable income at the end of the year.
Before deciding whether to pay off your mortgage early or invest that money, a financial planner and tax advisor should be consulted. If it is expensive debt that is, with a high interest rate and you already have some liquid assets, like an emergency fund, then pay it off. If it is cheap debt a low interest rate , and you have a good history of staying within a budget, then maintaining the mortgage and investing might be an option.
So the best course is usually somewhere in between: If you need some liquidity or cash, then pay off a large chunk of the debt, and keep the rest for emergencies and investments. Just make sure you take an honest look at what you will spend and your risks. Article Sources Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.
We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. Financial Industry Regulatory Authority, Inc.
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