Paying off your mortgage ahead of time Vs. Investing: Which Is Better?

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The housing market and home prices have skyrocketed over the past year, as many have taken advantage of low interest rates to get their first home or buy a bigger home. Likewise, the stock market has seen massive killings over the past year.

So if you have money to spare, it can be difficult to decide whether to use that money to pay off your mortgage early or invest it. Both options can create two different ways to make more money.

Paying off your mortgage ahead of schedule means that old monthly payments may go towards saving or investing in something else. If you invest your spare money, there is an opportunity to make great profits for the same or different purposes.

Connected: Refinance your mortgage to earn more and your savings

We’ll look at both options to help you decide what’s best for you.

Pros vs. Cons of early repayment of mortgages

From a purely financial point of view, conventional wisdom might suggest that you pay your debts first. But these decisions are not always so black and white. As always, your personal life situation should be the primary factor in determining which direction you decide to go. We’ll tell you why you should or shouldn’t pay off your mortgage early.

Pros to paying your mortgage

  • Savings on interest payments. You can save a lot of money by taking your mortgage off your plate before the due date. First, there are significant savings in interest payments, amounting to thousands or tens of thousands of dollars.

  • Getting rid of debt. Nobody likes to owe large sums of money to a lender, especially if they are designed for 15 or 30 years, like most mortgages. Paying off your mortgage ahead of schedule means one big account less to worry about. Compared to all other costs associated with owning a home, principal plus interest payments account for the lion’s share of the debt burden.

  • Increase your capital. Paying off your mortgage quickly means accumulating more capital in your home faster. It also means you can choose a different route and refinance your loan, which can lower your monthly mortgage payments. You can also use this equity through a home equity loan or home equity line of credit (HELOC), which you can use to tax deduction improvements that add value to your home or other major expenses.

Connected: Refinance your mortgage to earn more and your savings

Cons of paying a mortgage

  • Perhaps there is a missed opportunity. Any extra money you spend to pay off your mortgage faster is no longer available for other investments. This could be your 401 (k) fund, a rainy day fund, the opportunity to buy a boat or car, for example, or an opportunity to take advantage of a stock investment that can generate big returns.

  • Your money is not available. A home cannot be sold and converted into cash overnight, even if it is a cash sale. In the event of an unforeseen medical emergency or other critical financial situation, selling your property to obtain the necessary funds will be a lengthy process and possibly less than the cost of the house if you are in dire need of it.

  • Lack of tax incentives. The money that goes into paying off the mortgage faster means that less of it can be put into tax-deferred retirement accounts. You also run the risk of missing out on your mortgage interest tax deductions if you include them when filing your tax return.

The pros and cons of investing instead

Most people can’t wait to get rid of the burden of mortgage debt and become homeowners. But spending a lot of money paying off your mortgage isn’t always the best financial idea. This is especially true when mortgage rates remain historically low and your monthly payments are already very affordable. Instead, it allows you to replenish your nest with other investments.

Mortgage concept photography

Mortgage concept photography

Pros to investing in the first place

  • Use your money earlier to get faster returns. The main reason to invest your money instead of paying off your mortgage faster is for a great return on investment. The stock market’s average annual return has recently exceeded mortgage interest rates, making it possible to capitalize on the difference.

  • More money is available when you need it. Unlike a home that ties your money together and only gradually increases in value, investing in more liquid financial assets means you can easily sell and access your money if you need to.

  • 401 (k) match. If you have an employer-sponsored retirement account and your job matches your contributions, then over time this is an additional income from investing extra money. These contributions are also pre-tax. This means that you can invest large amounts.

Cons of investing in the first place

  • The higher the reward, the higher the risk. It would be an understatement to note that there is a high level of volatility in the financial markets compared to the housing market in terms of mortgage ownership. Investing in any stock investment is risky, especially if you are taking a short-term approach. Only go down this path if you have a higher risk tolerance and financial cushion.

  • If you don’t buy a home sooner, there is a risk. Investing instead of paying off your mortgage faster means you will be in debt for longer to the lender and it may also take longer to build a home equity capital in your home. There is also a risk of foreclosure if you are unable to make monthly payments, especially if you spend all of your reserves investing in the stock market.

Investment types

If you choose to invest your money instead, you can invest that extra money monthly in a fund that tracks the S&P 500 Index. The S&P 500 has had an average annual return of 13.6% over the past 10 years.

Thus, there is a good chance that in 20 years (assuming this is a 30-year mortgage) you may have more money from the investment than if you decided to pay off your mortgage faster.

In fact, it is possible that if you made enough of your investment, you could use some of your profits to pay off your mortgage debt faster.

How do I know which route is right for me?

Considering the pros and cons of both options, the best solution might be to use historically low mortgage rates to reduce your debt, as well as invest in your future.

If all of your ducks are in a row, you can significantly reduce your mortgage obligations by refinancing to a lower interest rate as well as shortening the term of your mortgage. And you can pay off your loan faster.

Connected: Refinance your mortgage to earn more and your savings

Savings from any of the above options can then be channeled towards investing in the markets. The end result is that you save money on paying off your mortgage debt in general, but you still benefit from the higher returns offered by the stock market.

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