If you are a homeowner with a mortgage, you might consider paying it off early if you can afford it. However, it may or may not be the best option when you are trying to make the most of every dollar. This begs the question: Is it better to pay off the mortgage or invest? Investing and paying off your mortgage are both significant financial decisions. Read on to discover the right path for you.
Primary Factors to Consider
There are six core factors to consider when it comes to paying off the mortgage vs. investment debate.
- The current market value of your house
- The interest rate on your mortgage
- Home appreciation trends
- Your income tax rate
- Current inflation trends
- Expected rate of return on investments
When used to evaluate alternative scenarios between investing and paying off a home loan early, these factors often favor investing over paying-down a mortgage.
Why Invest Rather than Paying Off a Mortgage?
As the saying goes, money makes money. Wealth is created by investing – not paying off debts. Here are some reasons why homeowners rather carry a mortgage and make investments than accelerate payments on the principal.
Homeowners must keep their assets liquid as cash reserves are critical in the event of a financial emergency. Homeowners who put all their money toward paying off their mortgage early may not have a cash cushion to fall back on.
Mortgage Interest Rate
Interest rates on mortgages are considerably lower than credit cards and personal loans because they are secured by the value of the property, and the interest you pay is often tax-deductible. Therefore, paying off the mortgage early or later is unlikely to make a significant difference in the overall wealth of homeowners.
Mortgage & Home Value
The value of a property is unaffected by a mortgage. The value of the house is likely to grow over time, regardless of how much the homeowner owes on it. Consequently, paying off the mortgage early does not bring financial benefits to the homeowner.
Mortgage payments become more manageable with time. For young homeowners, mortgage payments might be a financial strain, but with a 30-year fixed mortgage, time is on your side. Over time, it gets easier to make a monthly payment as the impacts of inflation and the potential for a higher salary take hold.
Profits & Performance
Over the long run, investments will beat the mortgage interest rate. However, it can be a scary decision to make an investment, especially considering the 2008 stock market meltdown. The best approach is to develop a diversified mix of investments with a 30-year time horizon. The time frame corresponds to the duration of a fixed-rate mortgage.
Pay off Mortgage or Invest? Make the Right Decision with Windes
Investment is the clear winner according to math and logic. However, the true answer to the question “Is it better to pay off the mortgage or invest?” depends on the individual circumstances of the homeowners.
For example, cautious investors with a low tax bracket and high mortgage interest rate are better off paying their mortgage early. On the other hand, investing is a better option for risk-takers with a cheap 30-year fixed mortgage interest rate and a high tax bracket. Other factors like age, temperament towards financial risk, and financial planning also come into play.
It is advisable to consult with financial advisors and your accountant to make the right decision. Windes can help. Connect with us today to further explore these alternatives.