Should You Pay Down Your Mortgage Or Invest The Money?
By Brett Gottlieb and John Mc Kean
Certain things are common knowledge. We know that we should minimize high-interest debt such as credit cards or student loans. We know the importance of living below our means and saving for the future. But what about those gray areas, those financial decisions that aren’t always cut-and-dried? Like what to do about your mortgage debt.
Mortgage debt is often seen as “good debt,” but does that mean you should keep it around? Should you throw every extra dollar toward your mortgage or should you invest that money instead? Like most financial choices, the answer is going to differ depending on your unique situation. Let’s look at the pros and cons of each strategy.
Growth Is Priority
The most important factor when evaluating your options is that of growth. You don’t want to leave the additional funds sitting in a savings or checking account where you’re earning less than a percent of interest. You want your money to work for you, so the question to ask is, “What option will give you the biggest payoff?” In this case, you’ll find the answer by pitting your mortgage interest rate against your expected investment return. You can calculate some rough numbers to assess which decision would make more financial sense.
Let’s take a look at an example to give you some context. Say your mortgage interest rate is 5%. If you estimate that, based on your risk tolerance and time horizon, you can pursue an investment return of 4%, it would make more sense to pay down your mortgage. Otherwise, you’re potentially throwing away 1%. However, if you are an aggressive investor and believe you could earn 8% on your investment, it might be more beneficial to invest.
This may sound simple on paper, but there are plenty of factors that could affect the outcome. And as we all know, even the best estimates aren’t guaranteed. It’s important to run a thorough analysis and consider taxes on investments, mortgage interest deductions, risk, and private mortgage insurance, among the other elements of your financial life. An experienced financial advisor can run all of the numbers and conduct a complete examination of your unique situation.
Weighing Your Options
There are some pros and cons to each choice that go beyond the raw math. Liquidity is a significant pro for investing since you’ll have greater access to the funds in case of an emergency. If you put the money toward your mortgage, for all intents and purposes, it’s gone. The only way to get the money back is to sell your house or refinance your mortgage.
On the other hand, an advantage to paying down your mortgage is that your house will be paid off sooner. You will have a greater chance of being able to enter retirement without a mortgage, or at least have your mortgage paid off earlier in retirement. This lets you free up more of your money before your medical expenses start to build. If you invest, your mortgage will be another bill you have to pay while in retirement.
Another benefit of paying off your mortgage completely is decreasing your risk. Once you own your home free and clear, you never have to worry about a foreclosure or having your credit damaged by missed mortgage payments. However, you still have to pay your taxes and carry some risk of having a lien placed on your property.
A Bit Of Both
For some people, it may make more sense to choose a combination of these two choices. For example, if you have less than 20% equity in your property, you may be required to pay private mortgage insurance, meaning you owe additional premiums on top of your mortgage principal and interest payments.
In this case, even if your mortgage rate is 5% and you can earn 6% on an investment, you may still earn a higher return on your money by paying down your mortgage. Once you pay it down to at least 80%, you free yourself of the need for private mortgage insurance and you can start investing, should you determine that is the ideal option for you.
What’s Right For You?
There are several factors to take into consideration when choosing whether to use your excess money to pay down your mortgage or increase your investing. No one strategy fits everyone, but at Comprehensive Advisor, our goal is to provide customized solutions that meet your needs and get you closer to reaching your goals. To learn more about how we can help you pursue the best return on your money in your specific situation, email us at info@ComprehensiveAdvisor.com or call (760) 813-2125.
About Brett and John
Brett Gottlieb is the founder of Comprehensive Advisor and a financial advisor with nearly two decades of industry experience. He graduated from California State University-Chico with two bachelor’s degrees in Business Administration and Economics. Brett is Life Insurance licensed in several states.
John Mc Kean, financial advisor, joined Comprehensive Advisor in 2016. He has been in the financial services and retirement planning industry for over six years. John is Life Insurance licensed in California.
Brett and John previously worked as Registered Representatives with Securities America, one of the largest independent broker/dealers in the country, and currently offer advisory services through AE Wealth Management, LLC. Both are passionate about educating clients on retirement planning. They take a common-sense approach to the planning process and work with clients to create a retirement road map to help ensure their assets are protected and they receive the income needed to enjoy their future. Based in Carlsbad, California, they work with clients throughout San Diego County. Learn more by connecting with Brett on LinkedIn or email them at info@ComprehensiveAdvisor.com.
Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Comprehensive Advisor are not affiliated companies. California Insurance Licenses #0C68886 & #0K37445. Neither the firm nor its representatives may give tax or legal advice. Investing involves risk, including the potential loss of principal.
This material is intended to provide general information and is believed to be reliable, but accuracy and completeness cannot be guaranteed. 244081