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Buying a new home is an exciting time and often a new phase of life. You finally have a place of your own where you can build a life and make memories. Purchasing a home is one of the most financially significant purchases that you can make and you have most likely put a lot of time and effort into saving up for a down payment and looking for that perfect place to call home.
Now you have a mortgage that you will most likely pay off over the course of 30 years. The idea of being in debt for that amount of time may be stressful and you may want to do everything you can do to pay off your mortgage as soon as possible.
Here are some benefits and detriments of paying off your mortgage early versus investing and paying off your mortgage over time to provide you with the information to choose what is best for you.
Choosing to pay off your mortgage early can potentially save you thousands of dollars over time, however, there is a lot to consider when deciding to pay off your mortgage instead of investing your money. First, think about where you are in life.
Are you an empty-nester and close to retiring? Or are you still early on in your career? If you are close to retiring, paying off your mortgage could be helpful. Not having a monthly mortgage payment could free up some of your cash flow which could be helpful when you are on a fixed income.
When you are close to retiring it is also likely that you are making less risky investments so the return you are receiving from those investments will be less than the cost of the interest rate of your mortgage. In this case it would be better to put your money towards paying off your mortgage rather than investing it.
You may want to consider paying off your mortgage early if you have a high interest rate. This could save you thousands over the life of the loan. Or you may want to think about refinancing your mortgage because current rates are very low and this could also save you money.
If saving money isn’t really your thing when you find yourself with extra cash, putting that money into your mortgage could be a good option for you because the forced savings would at least be putting your money in a good place rather than blowing it on materialistic items.
There are a few benefits and drawbacks to think about when choosing to pay off your mortgage early or invest your money. When your mortgage is paid off, you can enjoy the peace of mind of living debt-free and having an increased cash flow each month.
Unlike the stock market, your mortgage payment is very predictable. You will always know how much your mortgage payment is and the result of your monthly payment in Washington, Oregon, Idaho or Colorado versus the unpredictability of the stock market.
Investing could offer you a healthy return, but you still risk losing all the money that you have invested. Putting more money towards your mortgage will help you build up equity in your home and if you ever needed cash to use on home improvement projects, college funds or rainy-day funds you could take advantage of that equity with a Home Equity Line of Credit or HELOC.
Like most investments, there are drawbacks to paying off your mortgage early. When you pay off your mortgage early, all of your money is tied up in your home so it could be hard to access if you needed it in an emergency. And in an extreme case where you needed to sell your home in Washington, Oregon, Idaho or Colorado in order to get the cash from it, it may take a while to sell your home. You may be able to rest easier if you have more liquid cash.
When you pay off your mortgage early you will also no longer be able to take advantage of the mortgage interest tax reduction. While you no longer have a monthly mortgage payment you will miss out on additional tax savings over time. Your lender may also charge you prepayment fees so be sure you know the possible consequences of increasing your monthly mortgage payments before doing so.
Last but not least, if you pay off your mortgage and plan to sell your home at a later time you run the risk of the housing market dropping and you may have to sell your home for less than what you purchased it for.
You’ll have to take a look at your own finances to determine what is best for you, but in some ways investing your money could have a more valuable return than paying off your mortgage.
If you are younger, you have a lot of time to pay off your mortgage and you most likely have a low mortgage interest rate. As you get older it is likely that you will earn a higher income, which will make your monthly mortgage payment easier to pay over time.
With time in mind, investing your money in stocks and bonds or a 401k could be the better option over paying off your mortgage because they require more time for your money to vest. Investing your money may also offer you a higher return than the amount you pay in interest each month therefore making you more overall over time.
Mortgage interest rates are low compared to the interest rates of credit cards, student and other loans so it’s better to prioritize paying those debts first before putting extra money towards paying off your mortgage.
Paying off your mortgage gives you the peace of mind of being debt free and can free up your cash flow each month. However, investing your money can allow you to maintain cash liquidity which would be beneficial in the case of an emergency. Paying off your mortgage does not affect the value of your home so investing your extra money and taking the allotted time to pay your mortgage could result in a higher overall return.
Besides investing your money in the stock market, another option is to invest your cash in real estate. This route could take you longer to see a return because you will have to save for a down payment on a second home and typically financing for an investment property requires more than 20% down. Once you acquire the new home you may need to make improvements and take the time to find a suitable renter.
Investing in real estate allows for high returns because the rent you would receive each month will most likely be more than the mortgage payment and there are also tax benefits for owning multiple properties.
Real estate in Washington, Oregon, Idaho or Colorado will also appreciate over time especially in growing areas like Bend, Oregon or Boise, Idaho so you have the opportunity to make more by increasing the amount for rent while the mortgage payment on the property remains the same.
There are a couple steps you can take before deciding to pay off your mortgage or invest that could financially benefit you. You could start by paying down any high interest debt such as credit cards or student loans. Then focus on saving up enough money for a 6-month emergency fund. And you can make sure you are putting enough away each month in your 401k or retirement plan to maximize your employer match if you have one.
Choosing whether to pay off your mortgage early or to invest your money is a debate for many homeowners. Crunch the numbers to see which option will be the best for you and your financial goals. We hope these tips were helpful.
For all of your home financing needs, Sammamish Mortgage is here to help. Our knowledgeable mortgage experts can answer all of your questions and walk you through the mortgage process. We currently lend in all of Washington, Oregon, Idaho and Colorado and offer a wide variety of mortgage programs and tools with flexible qualification criteria. Contact us today to get the mortgage application process started!
Whether you’re buying a home or ready to refinance, our professionals can help.
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No Obligation and transparency 24/7. Instantly compare live rates and costs from our network of lenders across the country. Real-time accurate rates and closing costs for a variety of loan programs custom to your specific situation.