The “American dream” of owning a home hasn’t faded over time. And for good reason. Nothing beats having your own space to call home. (Today, with record-low inventory, low interest rates, and high demand, (1) the housing market continues to boom.)
Since most of us don’t have the luxury of purchasing a house in full, after the stress and drama of house hunting have subsided, we find ourselves saddled with a mortgage for the next 15-30 years. Incurring debt to one day own this major asset outright is unavoidable, so how do you handle it moving forward? Is it better to put every extra dollar toward your mortgage or invest that money instead? As with most financial decisions, the answer depends on your unique situation.
Identify the Best Use of Your Funds
If you are considering paying off or paying more toward your mortgage, we can assume you have at least some extra cash each month or a lump sum you’re looking to put to use. Leaving additional funds sitting in a savings or checking account where you’re earning less than a percent of interest never makes good financial sense. You want your money to work for you, so the question to ask is, “What option will give me the biggest payoff?” Many clients choose a simple comparison between their mortgage rate and the rate of return on their investment or portfolio.
Like most financial decisions, there are plenty of things that could affect the outcome, and the decision can’t be made in a vacuum. And as we all know, even the best estimates aren’t guaranteed. It’s important to run a thorough analysis and consider a variety of factors: the current interest-rate environment, potential taxes on new investments, the loss of mortgage interest deduction (if applicable), your risk tolerance and expected return of your investment portfolio, and private mortgage insurance, among other elements of your financial life. An experienced financial planner can provide needed guidance and direction when it comes to such a decision.
Weigh Your Options
There are some pros and cons to each choice that go beyond the raw math. Liquidity is a significant benefit of investing since, depending on which type of account you invest in, you may have greater access to the funds in case of an emergency or for your other financial goals. By placing the money toward your mortgage, thereby increasing the equity in your home, your options become more limited. The only way to access those funds would be to sell your house, do a cash-out refinance, or obtain a home equity loan or line of credit.
The advantages to paying down your mortgage are obvious. The additional cash flow created from the savings once the home is paid off can be redirected to your longer-term goals or strengthen your monthly budget once retired. The savings created could also potentially be used to offset your healthcare or long-term care costs once retired as well. However, paying extra toward your mortgage during your working years means less cash available to invest in securities with a higher expected return—which, if done wisely, could outperform the guaranteed return you get by paying down your mortgage.
The Allure of Debt-Free Living
While avoiding extra mortgage principal payments is oftentimes the right “financial answer,” there is more to the decision than just the numbers, as paying off your mortgage can have other non-financial benefits as well. Transitioning into retirement debt-free can provide homeowners with peace of mind at a time when they are feeling financially vulnerable. Living solely off one’s investments and/or Social Security can be intimidating and having one fewer monthly bill can help with that transition. So, while the numbers don’t lie, they often don’t tell the whole story. Do not underestimate the feeling and mindset of having your mortgage paid off as you enter retirement.
It’s Not Necessarily All or Nothing
As with any major financial decision, only you and your trusted financial professional can determine which option is best for you and your unique situation. A combination of these two choices may make the most sense for some people. This could mean adding more money to each mortgage payment to bring down the principal while still putting the bulk of your extra money toward other investments.
We’d love to help you look at the big picture, evaluate your options, provide personalized financial planning advice, and even show you alternative investment strategies you hadn’t considered. At Match Point Financial, our ultimate goal is to help you pursue your financial and lifestyle goals with confidence. To get started, call 352-207-8014 or schedule a complimentary phone call using our online calendar.
Chris Reed is a financial advisor and the founder of Match Point Financial. Since 2002, he has been helping people make informed choices with their money and pursue their financial goals and objectives. He started his career with MetLife and has continued seeking to provide his clients with the best possible service through A.G. Edwards, UBS, and, finally, through partnering with Cetera Advisors LLC and forming his own independent firm in 2010. Learn more about Chris by connecting with him on LinkedIn or register for his recent webinar: Are Your Old 401(k)s Collecting Dust and Losing You Money?
Financial Advisor: Securities and advisory services offered through Cetera Advisors LLC, member FINRA/ SIPC, a broker/dealer and a Registered Investment Advisor. Cetera is under separate ownership from any other named entity.