How to Decide to Pay Off Your Mortgage Early or Invest
The thoughts of being able to pay off your mortgage early has a great appeal for many people. Not having to pay hundreds of thousands of dollars in interest over a 30-year mortgage is an excellent way to build ones wealth over time. The problem, however is deciding what is a better option -- pay off your mortgage? Or Invest the money instead at a higher rate? There are several factors to consider when balancing this question.
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Instructions
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Calculate the total amount of money you will pay on your home over the course of the loan. For example, if your monthly payments are $1,000 on a 30-year fixed loan, then your total payout will be $360,000 ($1,000 * 30 years * 12 months). This calculation really puts things in perspective when deciding to pay off your mortgage or use the money to invest.
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Compare the interest rate of your mortgage versus a projected interested rate you believe you could earn by investing the same amount of money. Say you took out a 30-fixed mortgage at 4.75 percent and you believe you can earn a steady 7 percent return by investing in the stock market. If this is a real case scenario, then you may want to decide not to pay off your mortgage early. The chances of maintaining this scenario over time are slim but possible and should be considered.
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Figure out your yearly tax deduction you can receive from your mortgage. If you decide to pay off your mortgage early, then you won't be able to claim the interest paid over the course of the year on your taxes. If this is your only reason not to pay it off early, then pay it off as your savings will be much greater by paying it off now. However, if other factors come into play, then maybe consider this reason to possibly influence your decision.
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Run some rough calculations on the recurring income that could be generated as a result of paying off your mortgage early as well as investing the same amount of money. For example, if you paid your mortgage off early, then you are putting your monthly payments back into your wallet. So if you were paying $1,000 per month on your mortgage, it would be like setting up a recurring income stream of that same amount every month. Likewise, investing money can also create recurring income in the form of interest or dividend payments. Figure out which is the greater of the two when doing your analysis.
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Consider additional factors other than interest and total payouts when determining if you should pay off your mortgage early. For example, instead of using a large sum of money to pay off your mortgage, maybe you would rather have this money available and ready to you. Using it in your home is not a liquid form of the asset and it may serve better in a high yielding savings account where you can directly access it in an emergency.
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Tips & Warnings
If you don't have the lump sum to pay off your mortgage early, consider making additional payments each month on your monthly payments to pay down your debt.
Check with your lender to ensure there are no prepayoff penalties on your mortgage before deciding to pay off your mortgage early.
