Should I pay off the mortgage or invest my extra cash?
This a common question – what should I be doing with my extra money each month? Should I be paying off my mortgage or should I invest that money? It’s a big decision since a mortgage is generally the largest amount of debt that most people have. It’s never a good feeling to have debt so it makes sense that many people are looking to pay it off as quickly as possible. There are a few factors that come into play when determining how to answer this question.
Mortgage Interest Rate
What is your current mortgage interest rate? Interest rates have been very low for a long time and, as a result, the majority of homeowners have a low interest rate or have refinanced their mortgage to get a lower interest rate. Since interest rates are low, it is relatively inexpensive to finance large purchases such as houses and cars. When interest rates were higher in the past, it was more expensive to finance large purchases thus making that same home significantly more expensive.
The rate of return that people can potentially earn in the stock market depends on many factors, most of which are out of our control. However, if you look over the historical data of the stock market returns, generally the stock market will give investors an average of 7% annual return. This return has a lot of assumptions built into it including the inflation rate, time that you are investing, and other factors. For illustrative purposes, let’s use an annual 7% return if you are investing 100% in stocks.
The real decision of whether or not to pay off your mortgage comes down to where your money is better spent, or where your money earns the most. If your mortgage interest rate is high, for this example, higher than 7%, it would make sense to pay off your mortgage. You aren’t able to earn more than 7% in the stock market so you would be better off investing your money into your home by paying off your mortgage quicker. If your mortgage interest rate is lower than 7%, then you would be better off investing your money. You have the potential to earn more than your mortgage interest rate and grow your investment.
This decision is a highly personal one, and a decision that should be discussed with your financial advisor. What I have explained above is a general rule of thumb, not a hard rule. Everyone’s situation is different and in some cases, paying off a low-interest rate mortgage makes the most sense.
Do you want to pay off your mortgage AND invest? Maybe you can do both! Start working towards your own financial goals with our free budget worksheet!
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