Is it better to pay down mortgage or invest?
Have extra cash and you’re deciding whether it’s better to pay down mortgage or invest? That’s an important question to answer!
This post is about pay down mortgage or investing.
Paying Down Mortgage:
1. Guaranteed Return
Even though it has a different name, a mortgage is still a loan so it means debt. If you put more money towards your mortgage, it means more of your money is going towards paying it down (in both interest and principal).
2. Peace of Mind
Again, since it’s a huge piece of debt, putting more money towards it means you end up owing less. Being that much closer to being debt-free can provide peace of mind or a sense of security.
3. Interest Saving
Making additional payments or paying more than the minimum could result in more interest savings. This is a huge pro, for those looking to save tens of thousands of dollars over the lifetime of said mortgage.
4. Builds Equity
As you’re paying towards your mortgage, you’re also in the process of building equity. Building more equity also enables you to have more options in the future. For example, it can allow you to take out a home equity loan. This could provide funding for future investments or large expenses in the future.
5. Closer to Owning Your Home
Who wouldn’t want to own their home outright?! Putting more money towards your mortgage not only means you’ll save more on interest, you’re that much closer to being debt free and owning your home! This could reduce monthly expenses since you’re no longer paying your mortgage once you’ve paid it off.
Invest:
1. Potential for Higher Returns
While it’s great to save on interest, the extra cash you have could actually earn you more. The stock market alone has an average return of anywhere between 7 to 10% annually. So if your mortgage interest rate is less than that, you could earn more letting your cash work for you in the market instead!
2. Liquidity
Investing in the market is much more liquid than real estate. For example, in order to get your cash back, you’d have to sell the property. Whereas, you could sell your invested shares with a few taps on your phone! Keeping that in mind, investing into stocks, bonds, or mutual funds are usually more liquid.
3. Tax Advantaged Accounts
If you’re eligible and have tax-advantaged accounts like 401(k) or IRAs, your returns could be worth even more. These accounts offer tax advantages, like deferred taxes or tax free growth. So the gains you make in these accounts could be worth more to you than putting it into your mortgage.
4. Dividend Income
Some investments pay dividends! This can add an additional stream of cash flow, completely passively! You can choose to have these dividends reinvested into the same fund that paid you or keep it as cash. So not only will the investment potentially increase in value, it can provide a stream of income for you!
5. Compound Growth
Lastly, it’s crucial to know that returns from investing in stocks, bonds, and mutual funds can generate more returns over time. Just with the dividend income alone, reinvesting the dividends back into the same fund results in a larger piece of the pie you now own.In addition to that, the more time your money is working for you can lead to exponential growth!
To reiterate, the top 5 reasons to pay down mortgage or invest are:
Paying Down Mortgage:
- Guaranteed Return
- Peace of Mind
- Interest Savings
- Builds Equity
- Closer to Owning Your Home
Invest:
- Potential for Higher Returns
- Liquidity
- Tax Advantaged Accounts
- Dividend Income
- Compound Growth
There you have it! Interested in learning more about investing in index funds? Check this post out for how to buy S&P 500 index fund.
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