The age-old argument that will likely forever plague financial circles: To invest or pay down the mortgage.
We must first acknowledge that this is a personal choice and that everyone has a different situation.
To set the stage, we typically need to make a comparison. For an easy example, if person A has a $1,000 mortgage payment and $500 a month to put towards their finances, they have two options. Option number one is to invest that $500 in an investment portfolio. Option number two is to use that additional $500 to make a principal payment on their mortgage, shaving interest off the backend of the loan.
We want to keep this conversation straightforward, so we want to limit the variables. There are other strategies to pay down a mortgage, like a 15-year mortgage or bi-weekly mortgage payments.
It’s ok to be emotional
Most in the ‘pay off the mortgage crowd’ will usually admit that their choice is emotional. Nothing wrong with that, as personal finance is indeed personal. However, we must start by examining the data will our emotions on the sidelines.
Currently, I have a 30-year fixed-rate mortgage at 2.75%. I do not plan to have an additional principal payment because I believe I can earn a rate of return over the next 30 years that exceeds 2.75%. One of the significant benefits here is the extra liquidity accumulated will often allow one to write a check and pay off the mortgage, in some cases, sooner than if they made additional payments.
However, I understand the psychological benefits of being debt-free (especially before retirement).
Does investing make sense?
In general, the past ten years have been particularly good for individual investors who have invested in a broadly diversified portfolio.
Does it now make sense to take your earnings and pay off the house? Possibly. This article is merely scratching the surface on a complicated topic. Given the low mortgage rates, investing the extra money is an option worth considering.
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