Pay off mortgage or invest? If this is a question that’s on your mind then most analysts and financial wizards will say that you are in a good financial position. This also means that most or all of your debts like the auto loan, mortgage etc is paid off or you would be in a debt free situation in a few months time. A debt free situation should be considered the best time for investments.
When you think of pay off mortgage or invest, the first thing that creeps into any investors mindset is that whatever pays off well in terms of money is a better decision.
Let’s look at why you should pay off for your mortgage early. Before that it is relevant to assume that most people are in the ‘pay off mortgage and invest’ category rather than the ‘pay off mortgage or invest category’. What that means is, you either want to proceed step by step (first the mortgage then the investment) or you want to pay off mortgage and investment simultaneously.
What most people who own mortgages and would want to invest as well feel that they don’t want to lose any percent of money so that you could get a x% + gain. Let’s see how that would look mathematically. Considering that you have a 6% home loan you are sure that investments in stock funds would allow you to earn around 8% and that is after you clear off your mortgage that include fees as well as taxes. On a personal front you would like not to own a lender or bank $150 interest every month even if you feel that you would miss out a nice fat chance to earn $170 for a month. So pay off mortgage automatically gets an advantage in the mortgage or invest debate.
Most people believe that paying off their mortgage first is a big step that would give them a huge emotional satisfaction. Let’s take for e.g. considering that your mortgage rate is fixed at 6%. With every $100 of taxable income investments after you pay your 20% of takes you get to keep 80% as your income. If you happened to invest you would get an earning of 4% which would be a rough $40. And after you pay of your taxes on this return on investments you would get $32 with you.
Just in case you had a $1000 to pay of your mortgage and you used it to pay part of it you would get a good saving on your 6% or $60 as in inters cost however you would not have the $60 with is the extra income to deduct from your tax returns, ultimately you would be saving around $48.
Taking this same factor if you manage to save about $16 in a by only paying off a part of your mortgage instead of thinking of investing your extra income that was made which is a clear calculation of $48 (net saving on mortgage interest) – $32 (net interest that was earned on investment) = $16 .
Therefore the conclusion is that according to most analysts, the decision to pay off your mortgage early so that you invest and maintain an investment portfolio is more profitable in the pay off mortgage or invest confusion. Once you pay off your mortgage early you can invest in risk free investments which are treasury securities, bank insure certificate of deposits, however if you want to earn more interest that what you would have to pay off as mortgage interest then its best that you invest in long term investments like stock and index funds. This will be definite big earnings than what you would be paying off as interest on your mortgage.
Twitter
My name is Ciprian Ginghina and I’m a full time web developer with more then 5 years experience under LAMP platform, JQuery framework and other goodies like that. I'm also involved in online marketing field.