Should You Invest or Pay Off Your Mortgage?

Financial Advisors

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kate_sept2004 /

You are in an enviable financial situation. You may have saved a significant amount of money, received a large bonus, received an inheritance, or have a significant amount of change left over after meeting your financial obligations. So what’s the best way to use that cash? Should I invest or should I pay off the mortgage?

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GOBankingRates asked financial advisors for their opinions, and the answers turned out to be mixed. Here are his five questions the money expert himself should ask to determine if paying off a mortgage or investing is the most profitable for you.

Before you start

Henry Habgood, a wealth adviser at Washburn Capital Management, said investors should make sure their finances are stable before deciding where to put their money.

“We need to think bigger,” he says. “How much money do you have in reserve for emergencies? Are there any major expenses planned? If you have enough money already secured and you have liquidity to play it safe, then you are in a position to choose one or the other.”

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What is the interest rate on a home loan?

SoFi financial planner Kendall Mead said the main financial factor to consider is mortgage interest rates.

“Opportunity cost ultimately becomes an issue when deciding whether to invest or pay off a mortgage. What can you do with this cash other than pay off your mortgage? For example, you could invest that money instead, and depending on how you invested it, it could exceed the interest you pay on your mortgage over the next 30 years.

“Higher interest rates could make mortgage repayments more competitive, although again the opportunity cost is an issue. It’s not a guarantee of a return, but it serves as a starting point: when mortgage rates were 3%, it’s easy to argue that in the long run, you could earn more than you’re paying in interest on your investment. I could, but when interest rates get closer to 7%, it becomes difficult, and above 7%, it may make more sense to pay off the mortgage.”

How much property do you own in your home?

When you receive a lump sum of cash, such as from an inheritance, how you spend it depends partly on the amount of stock you own in your home, says Stuart L. Mr. D. Boxenbaum says. At Statewide Financial Group.

“If you already have a lot of money in your home, but you don’t have too many investments set aside for your retirement, this is also a simple conclusion. Let’s use it to keep it in shape,” he said. “If you have some assets in your home, but not a lot, and you don’t have a lot of retirement savings, you may need to do both. should be consulted.”

Do you have a tolerance for risk?

All investments involve risk, but can be rewarded with significant returns.

“If mortgage rates are low and you’re comfortable with investing, it might make sense to invest that money,” said Andrew Boyd, financial and wealth adviser at Finty. “Over time, the potential gains from a well-diversified investment portfolio could exceed the interest saved by paying off mortgages early.”

Worried about your mortgage debt?

“Personally, some people are uncomfortable with going into debt,” said Joseph Dohler, CFP and vice president of wealth planning at MetsaSarma Advisors. “The emotional relief of knowing that this debt has now been paid off may outweigh any other long-term financial gains that may result from a different financial strategy while remaining in debt. .”

Boyd agreed.

“If you’re a conservative or approaching retirement, paying off your mortgage may save you a lot of money each month and give you peace of mind,” he says.

Why not do both?

Bilpin founder and financial planner James Allen said in some circumstances it makes sense to use available funds to both pay off mortgages and invest.

“Paying off your mortgage early guarantees a risk-free return on par with your mortgage rate. This is a pretty lucrative deal, especially in a volatile market. Don’t pay it all off at once.

“Instead, make additional payments on the principal to reduce the total interest you pay over the life of the loan. This way, you effectively invest for risk-free returns while also investing in the future. The income can be used for other investments.”

how much money left? Especially if mortgage rates are below the historic 7% return on investment Mead mentioned, he said.

“So my advice is this: don’t choose. Play both sides of the coin,” he said. “Pay off your mortgage, save interest, and invest with the expectation of a higher return. This is a balanced approach to spread risk and has the potential to remain stable in the long run. I have.*

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This article originally appeared on Ask Your Financial Advisor: Should You Invest or Pay Off Your Mortgage?

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