On the road to the nirvana of financial freedom, you will find the speed bump of mortgage payments. You are not alone. Of the $13.15 trillion that Americans owe, $8.88 trillion is in the form of mortgage loans. So, should you pay off your mortgage wholly or invest more for financial protection?
The answer to this question is not always cut and dry. Wishes aren’t horses, and your desire to be free may be in sharp contrast to your financial statements. A delicate balance between your desires and financial insight is what is needed to make the right call.
There is no cookie cutter answer here, but a custom fit decision that should be perfect for your finances. To lessen the confusion between these two choices it is crucial for you to break down your financial priorities into two main groups.
Personal finance priorities
What are your personal values? Are there individual finance goals that you have at hand that better reflect your values than a mortgage payment made early? Personal finance decisions should be prioritized ahead of all other investment dreams you may have. These will help to lay out your financial foundation.
Return on investment considerations
Once you have zeroed in your personal finance issues and fully satisfied them, then begin to think of the bottom line. Is it more profitable for you to pay off that mortgage or invest the difference?
How to build a solid financial foundation
Laying a healthy financial foundation will help you to pursue higher financial strategies. Before you take on that full mortgage payment or invest all your capital, first of all, build your economic bedrock on the factors below.
- Ensure that you have at least 15-20% of your income directed to your retirement kitty. If there is a workplace retirement fund, ensure that your funds are able to match and max them out. The return on investment of an employer matched 401(k) retirement plan is unbeatable.
- Set up your children’s’ education savings account. A 529 college account, a Coverdell IRA or simple prepaid college tuition can help you take advantage of tax-deferred savings.
- Pay off all other non-mortgage debts especially those of the high-interest caliber. Most other debt has a higher interest rate than mortgage so it might not make much sense to pay off debt with lower interest rates first.
- Have a three to six months emergency kitty socked away.
- Maximize your tax-deferred as well as tax-free retirement savings too. If those opportunities are not used, they are lost and are unrecoverable due to annual limitations.
- If your mortgage is already underwater, it might not help to throw more money after it. It is possible that a more secure asset will give you a better payoff in the end.
Once you have laid your financial foundation, then the tag of war between a paid off mortgage or investment should get more comfortable. The option between them that gives you a higher after-tax ROI should be the clear winner. Without a crystal ball into the future though, it is impossible to tell which of the options will bear more fruit with time.
Which is why other factors come into play in the decision between the certainty of mortgage versus the uncertainty of investing.
Have you ever encountered a homeowner with regrets over a paid off mortgage? Not likely. Why? Monthly mortgage repayments take up a massive chunk of your monthly income. They restrict your cash flow and hinder all other beneficial financial decisions.
Reasons to pay off the mortgage first before investing
There are many advantages to a paid off a lease. They should help give pointers that will assist you to make a decision to this dilemma. These include;
- Interest saving
Say for example that your mortgage interest rate is 4%. All the extra money you pay saves you this percentage in interest. At the end of the life of your mortgage, you will have saved up thousands of dollars in interest rates, just paying off all additional principal.
Debt taxes your emotions forcing you to work harder, longer and worry more than necessary. With a substantial amount axed monthly from your paycheck, you are always stressed out on how to make ends meet with the little that’s left. A paid off mortgage will not only free you up emotionally but will also get you off the debt cycle.
A plan to pay off your mortgage early will ensure that you will spend less when buying it. Such an outlook may very well keep you from accruing debt over cars, personal loans no credit check from nation21loans student loans, and furniture ensuring that you live debt free.
The peace of mind a paid off mortgage gives is incomparable to none. The worry that something big and bad may happen and rob your off of your livelihood is something every homeowner thinks about. A job loss, illness, family crisis or death with a paid off mortgage is more surmountable.
Only having to worry about food, utilities, and a few other bills will give a blanket of security that in the worst case scenario, you will still have a roof over your head. This is mainly a very calming notion for those going into retirement.
You will have more cash on your hands
A paid off mortgage leaves you ready to face the challenges of college tuition fees as well as frees up money for investments. You can also quickly put aside more cash for your retirement contributions. How but more travel, gifts or better healthcare for your family? Great, inst it?
A return on investment that’s guaranteed
The roller coaster movements of the stock market or real estate market are the direct opposite of the certainty of a ROI of a paid-up home. There’s also eliminated interest expenses and imputed rental value of your living space. If you do not have the stomach for volatile financial markets, then a paid-up home is an excellent route to go.
It’s an achievable investment
While it is not easy to pay off a mortgage, it is easily the most motivating goal you can chase. It is easy to wrap your mind around it and plan for it. Other investments may feel more surreal and harder to grasp but a house you are living in is tangible and paying for it is exciting!
Reasons to invest first before paying off the mortgage
All the money you’ll tie up in your mortgage repayment will not be available for any other investment opportunities. Remember mortgages are low-interest debts, so limited finances could be better invested elsewhere.
A low return on investment
Mortgage interest rates are meager compared to other investment vehicles that have significantly higher interest rates.
Homes are not liquid assets
Selling a home is often difficult and, so if you need to sell it to meet urgent financial needs, you could be in for loads of frustration
An undiversified portfolio
When all your cash is sunk into your mortgage, you remain heavily reliant on your house’s value. If it declines with time, then your net worth will be very negatively impacted.
The final word
Your risk tolerance is what matters most when making a decision on whether to invest or fully pay up your mortgage. With discipline, all your financial goals are achievable whichever option you choose. Begin with the foundation and then diversify.
December 22, 2018