You have a little bit of extra money and you don’t know what to do with it. Should you pay off your mortgage or invest the money?
There is no cut and dry answer. It’s not a one-size-fits-all approach. Instead, you have to weigh both sides of the equation to determine what is right for you. We discuss the important factors to consider below.
What’s Your Interest Rate?
The interest rate on your mortgage helps to determine what you should do. If you have an exceptionally high rate, you pay a lot of money to keep that balance outstanding. If this is the case, it may benefit you to pay off your home loan rather than invest the money. If you can’t make more money on your investment than you would pay out on your mortgage interest, it’s not worth it. You are better off getting rid of the debt and then investing whatever money you have left.
On the other hand, if you have a low-interest rate on your mortgage, you may see a greater return on your investment by investing the money. You will likely need to be an aggressive investor in order to make good on the deal, but if you can manage it, keeping the debt outstanding may actually make you more money in the end.
How Much Cash do you Have?
Every homeowner needs an emergency fund. It’s crucial in the event there is a crisis that you must pay for right away. If your money is tied up in your home, it’s anything but liquid. You can’t access the funds fast. You also cannot access it if it’s in a large investment. While you could sell stocks or bonds, it may take a little while. Tying it up in CDs or other time-sensitive investments, such as an IRA, could make it nearly impossible to touch.
This is why knowing how much money you have in an emergency fund is crucial. If you have between six and twelve months of expenses saved, you may be in good shape. You can handle an emergency that is thrown your way.
If that’s the case, you can choose between investments and paying off your mortgage. If, however, you don’t have an emergency fund, you should work on creating that fund before you even think about paying off your mortgage or buying stocks, bonds, or any other investment.
Do You Need the Tax Write-Off?
It’s not a lot, but the mortgage interest you pay can be a great tax write-off if you need it. If you itemize your deductions, you’ll get a few cents back from every dollar you pay in interest. This could help come tax time when your tax liability is high. If you have a lot of investments or you are self-employed, the deductions can help lower that tax liability, keeping more money in your pocket during tax time. If you own your home outright, the only write-off you have regarding your property is the real estate taxes you pay. This may not be enough to make much of a difference in your taxable income.
What’s Your Credit Like?
If you have a low credit score, you’ll need that mortgage to help boost it up. This is assuming of course that you make your payments on time. On-time home loan payments have great influence on your credit score, helping to boost it up even when it’s at its lowest.
You might think paying the mortgage off would help your credit even more, but the help would only be temporary. Without the consistent payments and the lack of a trade line, your credit score could actually fall because you don’t have any positive activity influencing your credit score.
What are Your Savings Habits?
Finally, you should consider your savings habits. Are you a saver or a spender? Keeping the mortgage forces you to be a saver. The benefit is that you can’t touch the funds – they are tied up in your home’s equity. Sure, you could apply for a home equity loan, but that takes a while. This helps eliminate the risk of spending the money you have.
If, on the other hand, you are a saver and want to invest the money, you may be better off paying the mortgage off and investing wisely. Only you know your habits and what you are more likely to do with your funds.
As you can see, deciding between paying off a mortgage and investing is a very personal decision. Your habits, financial position, and tax needs all play a role in your decision. Seeing where you stand will help you make the decision that works best for you.