In many ways, choosing between paying off the mortgage faster or investing more mirrors the decision gamblers make every time they place a bet at the slot machine. If you really think about it, each pull of the handle is just like when someone decides to “invest.” Sure, it’s possible to win given the right circumstances, but many people lose their shirts when they gamble. And every time you are up big, the thought of quitting while you are ahead is always in the back of your mind. Do you continue playing and hope for more winnings? Or do you take what you’ve earned so far, and call it quits?
Now let’s step back from the casino analogy. When you make your mortgage payments, you’re sticking to the safer route. You’re choosing to take what you’ve earned and stop betting. You may not win anymore, but you’re at least going home a winner.
So how do you choose between paying off your mortgage and investing more money? That’s a question only you can answer. We can help you get there, though. No ante required.
Paying Off Your Mortgage Early: One Less Monthly Payment
Having one less bill to worry about each month does sound pretty good, doesn’t it?
One of the biggest reasons to pay down the mortgage balance quickly (rather than invest) lies in the predictability of paying down debt. You know your final balance is decreasing with each dollar paid, and the quicker you pay that balance off, the less interest you’ll owe. By consistently putting extra funds in your mortgage, you’re bringing yourself ever closer to owning your home outright.
There Are Downsides, Though
In many ways, paying off your mortgage could be seen as the “responsible” thing to do. However, there are some considerations you need to be aware of, even for this choice.
Let’s say that you do end up paying off your mortgage. Now you completely own your house. While it’s true that you do have equity in that investment, getting those returns out of the walls and into your wallet isn’t as easy as withdrawing money from your checking account. Selling a car is one thing. However, listing your house brings a whole list of fees, which can quickly eat into your profits. Not to mention the fact that you’ll still need another place to live after it’s sold, and housing isn’t free.
Besides putting your mortgage payment back into your bank account, paying off your house could hurt you come tax time. You can typically deduct what’s left of your mortgage on your taxes. Without that monthly payment, however, your deduction goes away.
Invest in Your Future, Today
On the other side of the coin is to invest that money instead of putting it towards the mortgage. If you do things right, you can achieve a comfortable retirement. This is what we are aiming for at the end of the day, right?
After all, retirement lies at the heart of many investing arguments, as it’s the end goal for many of us.
Your risk does increase though, since “you’re building a liquid asset that has the potential to put you in a better financial position than if you simply eliminated your mortgage interest expense.” Instead of making the payments and methodically removing debt month after month, you can be proactive about your income.
So what do you invest in? One way for your returns to start gaining ground is to invest aggressively.
“Aggressive portfolios are often built to help you net gains of 10% or more,” SmartAsset advises. “Even if you fall a bit below that, your rate of return may be markedly higher than your mortgage rate if the market is doing well.”
For the cautious spenders, there are conservative investing options as well. Even tucking away a few dollars here and there can bring large dividends down the road — which you may need in retirement.
Sure, investing often brings a sense of risk. But you can still invest and bring the odds well into your favor. Remember our casino metaphor? It is possible to win — and win big. Sometimes, at least.
With Zero Risk Comes Zero to Little Reward
Risk is one of the biggest reasons many people simply don’t invest. The $500 you’ve saved up could drop down to $5 as easily as it could gain a couple zeroes at the end. That’s the decision you face each time you go for another pull on the slot machine.
There’s also a belief that big returns require expertise and knowledge of market trends. While there may be some truth to that thinking, a little research here and there could positively influence your investing decisions. You could bring in an advisor to do the research for you, but that cuts into your profits a bit.
Consider Your Options
Deciding between paying off your mortgage faster or investing extra funds lies in contemplating the fine details. Here’s a quick summary to get your thinking started. Consider these questions and your answers to them.
- What tax benefits does each option bring with it?
- What’s the interest rate associated with my mortgage? How does it compare to what I think I’d earn by investing? Would refinancing to secure a lower interest rate change this calculus?
- How comfortable do I feel with investing in the stock market, even conservatively? Would it be better to hire an expert instead? How does this change my expected return?
- What are my future financial plans? How long do I have before I will retire? How long will I stay in this home?
- What are my present circumstances? Given my age/number of children/salary/job outlook/debts/etc., what’s the best financial decision to benefit me presently?
- What’s the present state of both the investment world and the housing market? Will that state likely change in the near future?
- What debt do I already have accrued? What high-interest debt can I get rid of to further improve my credit score and potentially increase my savings once that payment is gone?
- Which approach characterizes my financial style — aggressive or conservative?
Once you’ve mentally checked in with your current financial circumstances and your future financial plans, the path may become clearer.
Money Isn’t Always Greener on the Other Side
Stories of investment success increase the allure to bet it all on the stock market and hope for a lucrative windfall. Yet for many, owning a house may be worth more than any six-figure check. Whichever path you choose to pursue, remaining informed serves to set you up for success.
Know what you’re working towards, why you do it, and how to get there. That way, you can enjoy the happiness of the moment when you achieve your goal. Celebrate all the hard work you’ve put into making it happen when the time comes. You deserve it.