It isn’t a simple decision to choose where you will invest the money you worked hard for. This is because both personal and financial factors and your overall investment strategy will affect this decision.
Maybe you received a tax refund or a large sum of cash as inheritance. The big question now is, what will you do with your extra money, then?
It may sound appealing to use it to pay off your mortgage early to save yourself from the weight of this interest-earning debt. On the other hand, you might find it wiser to invest your cash somewhere else to make more money in the long run.
In this article, we are going to look at if you should pay off your mortgage early or invest your money.
You Should Invest Your Money Instead of Paying Off Your Mortgage Early
Investing your extra money is an excellent way to increase the capital’s value over time. When you invest and hold your assets, you can earn more interest than what you will pay on your mortgage.
There are many ways to invest your money instead of paying off your mortgage early:
- Investing in real estate
- Investing in the stock market
- Investing in Mutual Funds
- Investing in bonds
- Investing in businesses
Your investments can also generate income that can be in dividend form that the stocks pay for or in the form of interest payments that you will receive if you hold a bond. Putting your money in an investment that produces income is a great way to establish an alternative flow of income.
Investments can be somewhat liquid as well. You can choose to sell them off and spend this money any time you need or want to. This is different from money locked up in home equity that is harder to access.
Is It Better to Pay Off Your Mortgage or Invest the Money?
If you are willing and ready to accept the volatility and risk associated with investment, investing your money tends to provide higher returns compared to paying off your mortgage early. In the case of stocks, you can get returns up to 10% annually.
Mortgage rates are often much lower than this rate so investing offers more success.
In the case of real estate investing, you can earn an almost unlimited return if you own a rental property that makes you money every month. You make money from the rents you receive when your tenants pay you monthly.
Investing is also better if you are planning to stay in the house for the rest of your life.
If you have no plans to sell your property any time soon, paying off your mortgage early won’t give you a lot of benefits aside from eliminating one of your monthly bills.
Why It Is Better to Invest Instead of Paying Off Mortgage Early
The key benefit of investing instead of paying off mortgage early is that you get to build assets with a potential of improving your financial situation. This is something that might not be possible if you just eliminate your expenses on paying off your mortgage early.
While there is no solid guarantee that there will be a growth in your investment, historical data suggests that there are high chances for you to earn more with the help of index investing, assuming a longer timeframe.
A short-term investment usually doesn’t give the market enough time to recover from downturns or dips.
In the case of real estate investing, I personally make $15,000 or more each month from my rental properties I own.
Because of those properties, I am able to pay my mortgage, travel the world, and do anything I want because I have the freedom that comes with extra money.
Example of Paying Off Early
There are several examples of paying off mortgage early.
Bi-weekly payments
For instance, you can make biweekly payments. This is a clever strategy wherein you will make a single full extra payment for your mortgage every year.
You can make 26 half payments which is just the same if you make 13 full payments.
If you are getting paid biweekly, you can set up automatic transfers to your mortgage from your bank account.
Pay extra to principal every month
Another way to pay off early is to increase your payment every month. Divide the regular payment by 12 then add this amount to your bill every month.
For example, if you are paying $860 every month, divide this by 12 which is equal to $72. Add this extra $72 to your bill every month.
Put any extra money from your tax return to the principal
If you get a tax refund, get a salary increase or receive any unexpected money, you can also pay this extra cash to your mortgage.
Refinance your property to a 15 or 20 year note instead of a 30 year mortgage
Finally, you can go for a shorter term for your loan like 20 years instead of 30 years or get a much lower interest rate. These choices can both help you save some money to pay off your mortgage early.
For example, you applied for a 30-year mortgage worth $150,000 with a fixed interest rate of 4.5%. Over the life of your loan, you will be paying an interest of $123,609 assuming you just make a minimum monthly payment of $760.
If you add an extra $188 to make a monthly payment of $948, you can pay off your mortgage in just 20 years, letting you save up to $46,000 in your interest.
Use your HELOC as a bank account and hack your way to paying it off early
Example of Investing the Money Instead of Paying Off Mortgage Early
Paying off mortgage early might sound like a wise decision. But, you can’t say the same thing if there are more important things coming up, like college tuition, wedding, or a much-deserved vacation.
For such instances, it is best to have extra money on hand instead of spending everything to pay for your mortgage.
Let’s take the example above. Say you decided to invest the additional $188 monthly instead and you get an average of 7% annual return.
Within 20 years, you will earn $51,000, which is $5,000 more of the total you saved in your interest, on your contributed funds.
If you continue to deposit this monthly $188 for additional 10 years, you will have earnings of up to $153,420.
Another example is by investing in real estate.
If you bought a single family home and rented it out to a tenant, you could make $300 a month in passive income. That is money that comes in without you working.
Imagine you bought 10 single family homes that makes you $300 a month.
You would then be making $3,000 a month in passive income without even working.
You Should Invest in Another Property Instead of Paying Off Mortgage Early
While there are lots of perks you can enjoy if you pay off your mortgage, you can also get more perks if you invest in another property. It is best to assess your overall financial health instead of focusing solely on your mortgage payments.
A real estate investor might find success paying off a certain point of their mortgage and allotting funds for other investments while simultaneously making mortgage payments. This gives homeowners many opportunities in the form of diversified investments.
When you invest in another property, you will be surprised to get tax benefits and higher returns as a whole.
For instance, most of the time, an investment property has a higher return compared to the overall mortgage cost overtime. This lets most investors enjoy long term security and possibly a steady income flow.
You will also notice that your properties appreciate over time that further improves your long term financial security.
What to Invest in When You Pay Off Your Mortgage Early
Investing In Real Estate
While real estate investments don’t guarantee success, the decision will be easier for you if you consider the benefits you will get. Investing in real estate offers a potential of getting higher returns.
You can also get some possible tax breaks if you own another property. Real estate investments also got the ability of producing cash flow every month.
For instance, rental properties could be a good source of passive income.
Owning a property also gives your asset the chance to appreciate in value so you can just sit back as you watch the property increase in value.
Another good argument is that real estate investment is a wise move to diversify your portfolio and lower your risk as a result.
Investing In The Stock Market
One of the main reasons why a lot of investors invest in stocks after they pay off their mortgage early is to create liquid assets.
You can have a better financial position as a whole if you have cash or liquid asset available to you with just one click of a button.
Though stock investments don’t guarantee a better return on investment, historical data offers a clear picture of stock market returns exceeding many guaranteed returns made after you pay off your mortgage early.
If you have a large income, investing in stocks also makes sense because it lets you save on your taxes as you build more wealth through your investments instead of increasing your regular earnings.
Invest In Mutual Funds
Mutual funds pool money from several investors then invest this money in securities like bonds, stocks, and short-term debt. Mutual funds are popular among investors as they generally provide many benefits.
One of these is professional management. Research is done on your behalf by fund managers. They choose the securities and keep an eye on their performance.
Diversification is another advantage of mutual funds. You don’t need to put all your assets in one place. Mutual funds usually invest in several industries and companies, helping lower the risks in case one company fails.
Majority of mutual funds also set relatively low amount of dollars for both initial investments and the subsequent purchases.
Investors in mutual funds can also redeem their shares easily at any time for the current NAV or net asset value in addition to redemption fees.
Start a Business
Starting a business is an excellent step someone can take after paying off mortgage early.
When you start a business, you get the chance to earn unlimited income according to the efforts you make and whether or not your enterprise succeeds or fails. Having a business of your own also lets you earn a living as you pursue your passion.
Maybe you got a special talent, like repairing cars, playing music or writing or anything else you enjoyed as a hobby.
When you transform this into a business, your working life will be more enjoyable and fulfilling, leading to a much happier life as a whole.
Invest in a Friend’s Business
If you invest in a friend’s business, you will have a passive type of investment and there is a chance that you will not be involved in its daily operations.
You will essentially invest in your friend’s ability to run a business and earn a good profit.
Just make sure that you know all your rights as the investor to make the most out of this significant decision.
Benefits of Paying Off Mortgage Early
There are many people who assume that paying off mortgage early is a good decision and this indicates that you are going towards the right direction. Below are some of the benefits you can get if you pay your mortgage sooner than later:
- More peace of mind and less risk – Your life will have less risk if you scratch off one debt from your balance sheet. You will be worrying less about bills and focus instead on taxes, food, and other basic needs. Add to this thought of removing the burden of debt off your shoulders. You can never underestimate the psychological advantages of being free from debt.
- Pay less mortgage interest – If you make additional payments on the mortgage principal, you can remove years or months off your mortgage and save thousands in interest. When you make more extra payments and pay faster, you will be paying less for interest.
- Getting rid of debt is something sure and guaranteed. Paying off the house you are living in is a sure thing compared to investing in stocks, for instance.
- Enjoy more freedom – You will have more freedom if you don’t need to make any mortgage payment. If there is a job you don’t want to take on, you can always do so because you don’t have debt obligations every month. You can do things you love instead.
- Have extra money to invest, save, and give – If you pay off your mortgage early, you will have more extra money each month that can be used for saving, giving, and investing. Your nest egg is going to grow fast if you don’t have debt obligations.
Paying off mortgage early and investing both offer many exciting benefits. At the end of the day, the decision is still yours to make.
Determine which of these two options work best for you. Consider your financial abilities and other aspects of your life to ensure that you will reach a decision that you will not regret in the end.