Should You Pay Down Your Mortgage or Invest the Money?
You’ve been working hard for decades and living on a budget. But now something strange is happening. You have more money on a monthly basis than you actually need. Now you have the problem of trying to figure out what to do with it.
It’s a wonderful problem to have, isn’t it? You don’t want your money to just build up in your checking account, though. Most people end up doing one of two things; either investing the money or paying down their mortgage. Which one is better for you?
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What The Numbers Say
First, let’s take a look at some math and see what the numbers say. The biggest factors are your mortgage rate and expected investment return. With those, you can do some rough calculations to find a break even point where one decision would be worth more financially than the other.
For example, if you have a mortgage with a rate of 5%, you would not earn enough on an investment returning 4% to make the investment worthwhile. That would be like borrowing money at 5% to earn 4%, or essentially giving away 1%. If you could earn 10% on your investment, then it would make sense, because you would earn twice what it was costing you.
A thorough analysis would also need to factor in things like taxes on investments, mortgage interest deductions, risk, and PMI. An experienced financial advisor can run all of the calculations and do a complete analysis of your unique situation.
Pros And Cons Of Paying Down Your Mortgage
There are some pros and cons of paying down your mortgage that go beyond the raw math. One downside is the lack of liquidity once you put the money towards your mortgage. Once it’s in there, for all intents and purposes it’s gone. The only way to get the money back out is to sell your house or refinance your mortgage. If you invest the money, you have easier access to it in case of an emergency or a change of mind.
One of the advantages of paying down your mortgage is that your house will be paid off sooner. You will have a greater chance of being able to enter retirement without a mortgage, or at least have your mortgage paid off sooner during retirement. That way you can free up more of your money before your medical expenses start to build.
Another benefit of paying off your mortgage completely is decreasing your risk. Once you own your home free and clear, you never have to worry about a foreclosure or having your credit damaged by missed mortgage payments. However, you still have to pay your taxes and carry some risk of having a lien placed against your property.
How Does PMI Factor In?
Maybe you shouldn’t just choose one or the other. Perhaps the best answer for your situation is a combination of the two. If you have less than 20% equity in your property, you are most likely paying private mortgage insurance, or PMI. For PMI, you have to pay additional premiums on top of your normal mortgage principal and interest payments.
Even if you can earn 6% on an investment and your mortgage rate is only 5%, you may still earn a higher return on your money by paying down your loan. When you pay it down to 80%, you free yourself of PMI. It may be best for you to pay your mortgage down, and then start investing once your PMI is gone.
How I Can Help
This is a general idea of how the decision process works, but as I mentioned above, there are a lot of other little things that need to be factored in. I have spent over 25 years in financial services, and I understand the ins and outs of both mortgages and investments. I can help you calculate the best return on your money in your specific situation. Call me at 949-481-1807 or email This email address is being protected from spambots. You need JavaScript enabled to view it. for a complimentary consultation. Let’s get your money working efficiently for you, so you can spend time doing things you love, like fishing.
Meet Rick
Over a 25-year career in financial services, Rick has helped hundreds of business and personal clients meet their investment goals by developing risk-efficient portfolio management strategies. He holds degrees in Economics and Psychology from the University of California, Irvine.
The water is Rick's second home: He and his family have been fishing Southern California and Baja going on four generations. In the 1940s, his grandmother worked at the Cannery Restaurant in Newport Beach—when it was an actual Albacore cannery. In the 1950s, his father was on the crew that built two of the boats still in service at Dana Wharf Sportfishing.
To schedule a complimentary wealth consultation or to get a second opinion on your financial plan, contact Sportfishing Financial today. To learn more about Rick, visit his website and connect with him on Facebook. To ask a question or get our list of upcoming fishing trips, call 949-481-1807 or email This email address is being protected from spambots. You need JavaScript enabled to view it..