How to make the right decision
Whether you have just received a raise and are considering the best way to use that money or if you are planning for the future, choosing where to invest the money that costs you so much is a challenge. It makes sense that many homeowners want to prioritize the payment of their mortgage debt, but does it make more sense to invest more money in their retirement savings first?
Evaluate your economic situation.
Whether you decide to pay your mortgage or invest in your future first depends on your economic situation. If your income increased substantially, the option you choose may be different than if you inherited a total sum and wanted to invest it.
If you are thinking of finishing paying your mortgage in advance, consider how much it would cost and whether the money you save on interest and the fact of not having debt are a higher priority than setting aside money to build your wealth for the future. In addition, you should consider where you are in terms of debt payments. In general, paying as much as possible on your mortgage from the beginning of the loan is better to avoid having to pay more interest. If you are close to the end of your mortgage, it may be more valuable to put money in your accounts for retirement and other investments.
You can pay the total of your mortgage in advance.
The idea of paying your mortgage completely and not only being the owner of your house but also no longer having debts can be quite attractive. Although many people who receive an additional cash inflow may prefer to invest instead of paying the mortgage total in advance, paying off your mortgage in full can save you thousands of dollars in the long run and is usually a solid financial decision.
If you received an increase or your income increased in some other way and you are still in the first years of your mortgage, paying almost only interest every time you make a payment, paying the total mortgage in advance could be the best option for you. Let’s look at some of the advantages and disadvantages of deciding to pay your mortgage instead of investing.
Advantages and disadvantages of paying the total mortgage in advance
You will save interest. If you pay the total of your mortgage in advance, you can save thousands of dollars in interest that you would have paid if you had not reduced the principal amount in the first few years.
You won’t have debts. Being the owner of your house and not having to make more monthly payments can be liberating. Depending on the size of your monthly payments, that’s $1,000 or more per month that you can use for other things.
You can make use of the liquid value of the house. If you decide to pay a large amount of your mortgage in the first few years, you can use that capital to open a line of credit guaranteed by the capital gain (HELOC) or make a refinance with cash disbursement to make some renovations in your house. Even if you don’t finish paying off your loan if you decide to take this path, you can use part of the cash you invested in your house, which is usually challenging.
You will have more free money. If you are no longer making mortgage payments, you can now use the money you used each month for those payments for other things, such as investing in your future or in things you enjoy.
Disadvantages of paying the total mortgage in advance
You reduce your savings. Although using your savings to pay a large part (or all) of your loan may seem like a good idea, it can be a risk to put all your money into an investment that is not very easy to access if you need money. No matter how tempting it may be, it is important to keep a little cash in reserve in case of economic emergencies.
It may be your only investment. If you put everything you have into your mortgage, you could be paying attention to other important investments, such as your retirement fund. You could also be earning significantly more on investments in slightly riskier places, such as the stock market.
No more tax deductions. If you pay the total of your mortgage in advance, you lose the ability to declare tax deductions on mortgage interest payments. These deductions are quite useful and can increase your repayment and decrease your taxable income if you continue to pay a mortgage.
You may have to pay fines in advance. Depending on your lender, you may have to pay some fines for paying your mortgage too quickly. If you pay a mortgage in the first few years of the loan, your lender may charge you a fine depending on the outstanding balance of the principal.
Choose how to invest your money.
Although paying a mortgage in advance can benefit homeowners and eliminate the burden of paying off a large debt, in some cases it could be smarter to invest more money in your future in the form of retirement funds or other investments such as stocks. The best time to pay a mortgage is at the beginning to avoid accumulating more interest over the years, and the same is essentially true about investing in your future. As interest accumulates over time, the longer your monetary contributions are saved for your future, the more they will be worth when using them. That said, starting to invest soon is also a solid financial decision. Let’s also look at some of the advantages and disadvantages of investing instead of paying your mortgage.
You will see a higher rate of return. As it is inherently more risky, investing in something like the stock market gives you the possibility of earning more money than you would save by paying your mortgage in advance.
You are increasing your future wealth. By investing in your retirement and your future, either through stocks, bonds, or even small businesses, you will increase (hopefully) your future wealth. By building your wealth now so that it will grow over time, you are preparing to be better financially later in your life.
Better liquidity of assets. Regarding liquidity, stocks, bonds, and similar investments are more liquid than mortgages. If you need cash, it will be easier to sell shares or similar investments and make use of that money than it would be to sell your house or try to obtain a refinancing with a cash disbursement.
The employer may make a complementary contribution. If you are investing in a retirement account, there is a possibility that some employers will make additional contributions. Your employer could make contributions equal to half of your contributions up to a certain percentage of your salary, or even contribute what you invest dollar for dollar. The more you invest, the more you can earn, so this can be an excellent opportunity to build your future wealth if your employer is willing to participate.
Investing is more risky. Unlike a mortgage, investing is risky. You may win and then lose thousands of dollars if you invest in the stock market. Your returns may be potentially higher, but they are not as safe or fixed as the returns you would hopefully see in your house over time.
You will continue to make payments. Investing costs money for which you are not even guaranteed a completely favourable return. Throwing all your money into an investment just to see that it decreases in value can be frustrating.
The investment does not make the debt disappear. If you put all your funds in a retirement account or other investments, you will make little progress on any debt you may have, whether it is student loans or your mortgage. Although you may eventually save enough if you invest to pay for those things, sometimes it may be better to just pay them once and for all before anything.
What if you do both?
It is very possible to pay your mortgage and invest at the same time, and many people do it. Although doing both simultaneously limits the amount you can invest in your house or your future wealth, you can make decent progress on each goal simultaneously. In this way, you can still save money for your future and, at the same time, increase the net value of your home.
If you are still eager to get rid of the mortgage as soon as possible, you can consider refinancing a shorter-term loan. Even if your payments are higher this way, you could still invest, save money on mortgage interest, and significantly increase the net value of your house. This strategy can be expensive, however, so you should know that this third option can leave you without significant savings.
If you have an inflow of money and it doesn’t make sense to put everything into your mortgage or investments, there are other viable options for you. To avoid any economic difficulties in the future, in case something happens, you could save your extra money in an emergency fund that you would use in case of a future economic problem, such as vehicle repairs, medical expenses or if you run out of work. If you have other debts to pay, such as student loans or credit card debt, you could also use your extra capital for that. If you are paying a mortgage on top of many other debts, it can become overwhelming, so it is always a good idea to take the burden off those persistent debts.
Should I pay my mortgage or invest?
Before deciding to pay the total of your mortgage in advance, you can start with the investments early, do both, or do none, and be sure to study the situation thoroughly. If you know that you won’t be at home for long, maybe putting all your money into a mortgage doesn’t make sense. Similarly, if you are unsure about investing a lot of money in a place where the rate of return is not promising, maybe investing all your extra money is not very sensible. At the end of the day, what you decide to do should reflect your economic situation and the options you feel comfortable with.
Conclusion: Decide what is best for you.
Investing in your future assets and paying a mortgage in advance can be extremely beneficial regarding savings and return on investment. However, we all have different economic situations, so be sure to consider which option would work best for you before taking the step. It is always a good idea to consult a financial advisor to help you make a plan. Remember, paying your mortgage and investing simultaneously is possible, particularly if you can refinance a loan with a shorter term.