Both options can help improve your finances, but there are certain factors — such as risk and liquidity — that you need to consider.
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When you end up with extra cash, whether it’s through a windfall or an adjustment to your monthly budget, figuring out how to put that money to best use can feel like a daunting task.
One decision you might be contemplating is whether to pay off your mortgage with the new money or invest it. While neither option is a poor financial choice, there are benefits and drawbacks to both.
Here’s what you should consider when deciding between paying off your mortgage or investing:
You need to know your own comfort level when it comes to the risks involved with homeownership and investing. Here’s how the two options generally differ in terms of risk:
On the other hand, the S&P 500 saw an annualized return of 13.84%, including dividends, over the past decade, from July 2010 to July 2020, according to The Wall Street Journal.
Paying off your mortgage early versus investing any extra money makes sense for several reasons:
Counterpoint: Since real estate tends to appreciate more slowly than stocks, you could miss out on significant market gains from other investments should you decide to throw all of your extra cash toward your mortgage.
Refinancing can also help you pay off your mortgage faster. If you have more money in your budget, consider refinancing to a shorter term with a lower interest rate. You can pay off your mortgage more quickly while saving money on total interest charges — just keep in mind that your monthly payment will be higher as well.
Credible can help you with your next mortgage refinance. With Credible you can compare prequalified rates from all of our partner lenders in just a few minutes.
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Learn More: When to Refinance a Mortgage: Is Now a Good Time?
Paying off your mortgage isn’t always the best use of extra cash. Some drawbacks of eliminating your mortgage payment early include:
Instead of paying off the mortgage, you could put some of that extra money into investing. Some of the advantages of this option include:
Counterpoint: Because stocks aren’t backed up with something tangible, like a home, and due to price volatility, you could see dramatic drops in your portfolio, which could result in losses if you sell during a crash.
Check out: Should You Get a Cash-Out Refinance to Invest?
Before deciding to pay off your mortgage or invest, it’s important to consider your own financial goals and priorities, and decide what matters most to you.
Here are some factors to mull over before you make a final decision:
Find Out: Should You Pay Off Your Mortgage Before You Retire?
Let’s run through a couple of scenarios showing what might happen should you put an extra $1,000 toward your mortgage or the stock market.
Say your mortgage balance is $200,000 with an APR of 3.25%, and you have a monthly principal and interest payment of about $870. If you put an extra $1,000 toward your mortgage each month, you could pay off your home in 10 years and six months and save $77,300 in interest.
But if you invested that $1,000 in a fund tracking the S&P 500 index, you’d likely see a far greater return. Assuming a 10% annual return, you’d end up with $191,249 in the same time frame. That’s more than double the amount you would have saved on interest had you decided to put that money toward your mortgage.
Credible is not an investment advisor, so be sure to speak with an investment specialist beforehand to see if the numbers work for you.
Sometimes it’s not just about paying off your house or investing. Depending on your financial circumstance, there might be better uses for your money. Here are some other options you might consider.
If you don’t have an emergency fund, consider beefing that up with your extra money. That way, you’re less likely to need to tap into your home’s equity or liquidate your investment account in an emergency. Your emergency fund can help shore you up against problems in the future.
Tackling high-interest debt, like credit card debt, before paying off the mortgage or investing might be your smartest financial decision. A high interest rate on your credit card can cost you more in the long run, and stock market returns rarely beat high interest rates on debt.
Think about refinancing your home loan to a shorter term. If refinance rates are low, and you cut your term down to 15 or 20 years, you can potentially save thousands in interest and be done with your mortgage sooner.
Plus, you might still have some money left over each month to invest, giving you the best of both worlds. Review your options to see what’s available, and what’s most likely to benefit your financial situation.
Keep Reading: How to Refinance Your Mortgage in 6 Easy Steps
If you think refinancing is the right move, Credible makes it easy. You can compare multiple lenders and see prequalified rates in as little as three minutes without leaving our platform. Use the table below to get started.
Miranda Marquit is a mortgage, investing, and business authority. Her work has appeared on NPR, Marketwatch, FOX Business, The Hill, U.S. News & World Report, Forbes, and more.
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