People are usually confused between whether to invest money and pay the debt till the last year or to pay the debt faster and then invest money. Like many other situations like that the answer to this question is also not clear. Many of the financial experts that paying off debt first is a better choice than investing money while many of them say that investing money is better than paying the debt faster. Rather saying one thing better than the other, I would leave the decision to you because it always depends upon how you take money and what is your financial situation. I will take you through some of the advantages and disadvantages of the both the scenario and you could then decide that which one is better for you. So starting,
The Pros of Paying the Mortgage Faster
There are many benefits of paying the mortgage faster, it gives you a lot of motivation if you are able to pay the debt, you can change your financial picture if you are able to pay off the debt.
If you choose to pay the mortgage faster than to invest money than this could help you to save thousands of dollars, yes you heard it right that you could save thousands of dollars if you are able to pay the mortgage faster. Let me explain this fact with an example, if you take a mortgage loan of $250,000 with an interest rate of 4.0, then if you keep that loan till the 30 years then you will pay $179,873 in debt, but if you pay the same loan in 20 years then you will have to pay a total interest amount of $113,588 that means you can save $66,285 if you pay the debt faster. This is a huge amount of money that you owe to bank and you can save this money.
So paying off your mortgage can save you thousands of dollars that can be worth. It also has much more benefits other than simply saving money. When you have a home and you do not have any mortgage pending then this could help you to reduce your cost of living. Although you would still have to pay the taxes and insurance but you would not have to pay any mortgage payment. This means that every month you would have an extra thousand dollars to spend and you can spend them anywhere you want, you can invest them somewhere or you can go for a vacation. This can enable to live a life that you wanted to.
One more benefit of paying off mortgage early is that it you will definitely get a return if you are able to pay the mortgage before time. Let me explain you, suppose you have a fixed interest rate of 4% on your mortgage then if you will pay the mortgage before time by putting all your force, you will be able to get a return of 4% (interest amount saving). If you have an interest rate of 4.5% then you would get a return of 4.5%. In this case, you will not have to worry about the stock market changes or the company situation and the return is guaranteed. If you have a variable rate, then this could even work more in your favor because you would be able to pay off more before the high interest rate come. So if you are intolerant man then this is the best option for you.
The most important benefit that comes when you pay off the debt is that you have a peace of mind. If you are debt free, then this can give you a peace of mind that you want, you don’t have to worry about the monthly payments anymore and you are free to spend your money. For many people this is one of the important thing as they think that they can sleep better if they are debt free.
These are some of the benefits that comes to you when you pay off your mortgage before time. Some people are happy with it but some think that investing money is a better option.
The Pros of Investing
If you are thinking about putting your extra income in to your investment account then to pay off your mortgage then there are some benefits attached to it that you must know. If you start investing money early then you are opening your gates for early retirement and becoming a millionaire. Investing comes with many benefits. You can earn a higher return if you invest your money in a profitable situation. The returns are not guaranteed in the stock market but if you get so they are much higher than paying off the mortgage faster. Stock market has its own ups and downs in the time but the amount of money that you have is much higher as the profit is almost 7% to 11% in a stock market. While if you pay off the mortgage early, it would only allow you to get a return of 4% or 5%.
Another benefit of investing money is that you can have access to it whenever you want. There are times when we are in need of cash or there is an emergency. In that case we need cash and we are paying the mortgage than it would take some time before we can actually access to cash. This is possible in two ways, if we apply for an equity or line of credit and if we sell the home. If we go for equity then it would take weeks to get approved and get cash and if we sell the home, it could even take months to do so because the selling process is not easy in many of the States. But if you are investing money and putting that in to a saving account and you have some emergency, then you could access that money in a day or two and you only have to make a call to your broker and then he transfers the amount to your account.
Apart from all these benefits, investing money rather than paying off the mortgage first allows you to save your income tax. The tax deduction programs allows you to have a tax deduction if you own a house on your mortgage. So it could be better to save an extra $10,000 of tax and pay lower mortgage.
What Are The Factors to Decide?
So these are the benefits of both the options. As is said in the start that it is up to you to decide whether which option is better for. Before you take a decision there are certain things to keep in mind. If you keep these factors in your mind, it would be easy for you to take a decision.
There are certain risk associated with investing money, so before you choose ask yourself a question that how much risk tolerance do you have? The stock market is always going up in the past but there are sometimes when the market is not good and the stock goes down so if you are good enough to take risk, then investing can be a good option for you. One more thing is that if you take risk, you will earn more.
Another thing to keep in mind before you take a start is that how much knowledge do you have about investing? If you do not have enough knowledge and you go for the investing option, you may end up in losing all the money. So if you have some professional guiding you at your back then it may be a good option otherwise paying off the mortgage first should the first option.
Another important thing to count is your current debt deficit. If you have a lot of consumer debts on you than it is not a good decision to start investing with a big amount of debt on your shoulder. If you have consumer debts than you must pay them first because consumer debt comes with a high interest rate as compared to the mortgage.
Insurance can also be a factor to decide whether to invest money or to pay off the mortgage first. Make sure if you have full insurance in all the factors so that you would not get any financial emergency and if there is an issue it could be resolved by the insurance agency.
The last thing to look at before you take a decision is that you should know what your financial goals are. Your goals helps you carve way for your future and if you are clear in mind that what you want and what road map should you take then you can get positive results.
Keeping these factors in mind, you can decide whether investing is a better option or paying off the mortgage could be a better option. Do comment in the section below and let us know if you have any queries regarding the article because we would love to hear from you.