Knowing the benefits of paying off a mortgage early versus investing that same amount is essential if you have some extra money and want to know what to do with it.
Some people think that paying off your mortgage early is better than investing because you can save on interest payments.
Others believe that you should invest your money to grow more wealth over time– depending on your rate of return, investing some extra money now can turn into thousands of dollars when investing sooner rather than later.
Let’s take a look at the pros and cons of each option to see which one is better for you!
Pay Off Mortgage Or Invest
It can be a bit confusing when it comes to what you should do with any extra cash that you may have.
However, both of these choices – pay off mortgage or invest- can help improve your financial situation over time and put you on the path to financial freedom.
Let’s discuss the steps to find out which is best for you- it may surprise you what’s the right answer for your cash!
1. Determine Your Financial Situation
The traditional way of thinking is that you should pay off your debt first, especially your mortgage because it saves on interest payments.
However, your monthly payment could actually have the potential to grow over time with a good investment.
The best way to figure out which option is better for you is by looking at your specific situation and what you hope to achieve with that extra cash.
Sit down and crunch some numbers so you can make an informed decision! The best way to crunch your financial numbers is by creating a budget. It will tell you where you stand because you will list all your income and debts on it.
If you don’t already have a budget, there are free budget apps such as Personal Capital and Mint, to help you get started budgeting.
When making this decision, you’ll want to consider how much money you have, how long before your mortgage is up for renewal, and what the interest rate will be in years to come.
Also, do you have a high-risk tolerance to potentially make more money down the road? If you’re okay with a bit of risk, then investing may be the better option for you.
2. What Is Your Mortgage Rate?
One of the most significant factors in deciding whether to invest your money or pay off a mortgage early is the current interest rate on your mortgage.
Mortgage interest rates usually vary depending on the current market. If you’re paying higher dollars in interest debt, then you may want to consider putting the money toward your mortgage.
If you have a higher interest rate, it makes more financial sense than paying off your mortgage because you won’t be paying as many dollars in interest when 2024 comes around.
However, if you can get a better return with your investment than what putting the money toward your mortgage gives you in interest saving, investing may be the wiser option!
3. What Investments Are You Interested In?
It’s essential to look at what investments are out there before deciding. If you have a particular company or industry that you think will do well in the future, then investing your money there may be a good idea!
Investing is all about having the right diversified portfolio with different types of assets that can grow over time depending on what the market does.
If you want to make more money, you may want to invest your extra money in a mixture of stocks, bonds, and higher-risk investments, while keeping some safe assets like CDs and real estate.
If you have no idea how the stock market works or if you think it may be too risky for you, then talk to a financial advisor. They can help you determine the best assets to invest in, ensure that your money grows safely, and give you the best annual return!
No matter what, it’s always best to have a plan before making any decision just in case something unexpected happens!
4. Your Finance Goals
Before deciding, you should look at your overall personal finance goals. Do you want to reduce all your debt first? Or do you want to have more money in your retirement accounts?
Figuring out your financial goals is crucial so you can make the right decision when it comes to extra cash!
Your financial plans may include: pay off my mortgage, get out of debt, increase retirement savings, invest in stocks, or more real estate. Whatever your personal finance goals are, make sure that this decision will help you reach them.
If you want to get rid of all your debts, you should put the money toward your mortgage loan first. Although you may not have as much money at the end of it, you’ll be free from debt!
However, if you want to retire soon or have more money saved up for emergencies, then investing might be a better option because it can grow your funds over time.
Choose the best retirement plan for you, and don’t forget to save up an emergency fund just in case something happens.
Paying Off Mortgage First
Let’s talk about putting the money toward your mortgage loan first and the pros and cons of paying off your mortgage early.
There are several advantages of paying off your mortgage loan before investing.
Paying off your mortgage loan is a good option if you’re looking for immediate gratification.
You’ll see your mortgage decrease month after month, and you’ll feel like you’re making progress towards reaching your goal of financial freedom!
For some people, having no debt is a fantastic feeling. If this is something important to you, then paying off your mortgage first might be the best decision for you.
Once your mortgage is paid off, you can take that monthly payment you were paying and apply it to other debts. You can use the debt snowball and make baby steps toward applying it to the monthly payments to your credit cards, car payment, and other debt you may have.
You also benefit from paying a mortgage early because you save on interest, build equity in your home, and could even refinance your current loan for better interest rates before you’re done paying off the current one.
There are some pretty convincing arguments for paying off your mortgage loan early. However, there are also disadvantages to paying your mortgage early.
Right at the top, of course, is that if you put your extra money towards knocking out your mortgage early, you may miss out on lucrative investment opportunities. It’s an opportunity cost of picking one over the other.
Another con is that if you pay all your extra cash toward the mortgage (and forget an emergency fund!!), it means that you may not have any liquid assets that you can use in case of an emergency.
Your house isn’t a liquid asset, like investments, so you can’t liquidate your house to pay for problems that come up. Then they rely on credit cards and rack up debts on those instead! No good!
Another disadvantage is that you can usually deduct your mortgage interest during the life of the loan from your taxes. The mortgage interest deduction is a great tax break savings that you’d miss out on.
It may not be considered a con or disadvantage, but after paying your mortgage loan off, you may experience lifestyle inflation, which means you may start to spend more money because you no longer have those loan payments.
How To Pay Off Your Mortgage
There are a few different money hacks you can use to pay down your mortgage. It all depends on your financial situation and how much you can afford to pay every month.
Use a debt payoff planner to see how much you can save by paying off your mortgage early. Then, pay a little extra on your mortgage payment each month. It’s a great way to reduce the high-interest debt you’ll pay and help you pay off your mortgage faster!
Consider a lump-sum mortgage payoff if your mortgage debt is small enough. It’s a one-time mortgage payment that pays off the entire debt, freeing up cash for other things on your to-do list.
Investing Money First
You must know the pros and cons of what you’re getting into when you start investing.
One pro of investing even $1,000 is that you have the potential to make a higher rate of return by contributing to the stock market. It can generate more passive income and earn you thousands of dollars more than you would save by paying off your mortgage early.
Another of the many benefits of investments is that you can reach specific financial goals. Investing in the stock market can help you save up more money for your retirement or for emergencies.
One of the most significant advantages is that you have quicker access to cash if you have an emergency because you can sell your investments if you need to.
The biggest con of having an investment is that there is always risk involved. You could lose money on your investments, which can be frustrating and stressful.
Another disadvantage is that it takes time for investments to grow. You may not see any benefits from investing your money until you’ve had it invested for a while.
Another disadvantage is that you still have to put money toward a mortgage payment, with possibly higher interest rates to worry about.
You will have to make the mortgage payments and your investment contribution each month, which may be challenging if you’re limited on funds or income.
How To Invest
There are a few different ways to go about investing your money, here are some of the best investments you can contribute to.
Consider what types of investments you’re interested in making before tossing money into one of the investment rings!
Top Investment Types
One of the best things you can do with your money is to invest it in a retirement account, which means when it’s time to retire, you’ll have plenty of funds and won’t have to rely on Social Security.
There are a few different types of retirement accounts you can invest in, but the most common one is an IRA or Individual Retirement Account.
Another option is a 401(k) retirement account, which usually comes with your job when you sign up!
Another popular option is the stock market.
You essentially become a part-owner of that company when you buy stocks and can make money if the stock prices go up! However, there is also the risk that the stock price could go down and that you will lose money.
Mutual Funds and ETFs
Last, mutual funds and exchange-traded funds (ETFs) work a little differently than stocks because they can invest in several different types of assets at once!
These investments tend to be less risky than buying individual stocks but could still decrease in value over time.
Cryptocurrency is a newer investment option that uses cryptography to secure their transactions. Bitcoin is the one that most people know. Cryptocurrencies can be volatile and risky, so it’s essential to do your research before investing in them!
There are companies, such as Robinhood, that you can use to buy Bitcoin as well as seven other different types of cryptocurrencies.
Why Not Both?
Why not do both – pay off your mortgage and invest your extra money?
Don’t have enough extra money to pay off your mortgage loan in full? Then consider paying the loan, with a little bump in payments, and invest some of the extra money. Then you get the best of both worlds!
You still have to make your monthly mortgage payment with a little extra to pay it off more quickly, but you can invest even a little of your extra money into different types of investments. That way you’re still reducing your loan while making more wealth from your investments.
Another way to save some money and do both is to talk to your financial institution to make a decision about refinancing your mortgage loan to save money over the life of your loan.
Unless you are independently wealthy, make sure that you can comfortably afford your mortgage payments and your investment contributions each month!
Should you invest your extra money or pay down your mortgage?
It depends on your specific situation and how comfortable you feel with taking risks. Both options have their pros and cons, so it’s important to weigh them all out before making a decision.
Sometimes it all comes down to the numbers- high-interest rates, return rates, and how much money you have to spare.
You can do some number crunching and compare what money you’d get with a rate of return versus how much money you’d save paying off your mortgage- whichever is more money (saved or earned!), that’s the better option for you!
You can also consult a certified financial planner, to help you with the numbers and make the right decision based on your real finances.