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Paying extra toward your mortgage can save thousands in interest, but investing instead might get you a better rate of return. (iStock)
If you feel weighed down by your mortgage, you might be anxious to pay it off as soon as possible. So when you find yourself with a little extra money in your budget, you may consider putting it toward your mortgage.
Paying extra on your mortgage is always a good idea but it might not always be the best course of action. Sometimes, depending on your financial situation, you may be better off investing any extra money you have rather than sending it to your lender. You’ll want to take a close look at the numbers before making your decision.
Here’s what you need to know about paying off your mortgage early or investing.
Whether you should put extra money toward paying off your mortgage or investing mainly comes down to interest rates. If you can earn a higher annual return on an investment than you’re paying on your mortgage, it might make sense to invest instead. You have to do the math.
Say you have a 30-year mortgage of $250,000 with a fixed interest rate of 4%. Your monthly payment is $1,194, not including taxes and insurance. You’re paying $179,674 in interest over the life of your loan, according to Credible’s mortgage payment calculator.
After five years, your loan balance will be about $225,000. If you can start paying $170 extra each month, you’ll end up paying off your mortgage almost five years early. The amount of interest drops significantly, as well: You’ll save nearly $28,000 in interest.
But if you take that same $170 and invest it in the stock market instead at an 8% average return, you’ll have more than $100,000 at the end of 20 years. That’s the same amount of time you’d be paying on your mortgage in this example. Consider what each of these options would mean for you.
Refinancing your mortgage can help you get a lower interest rate. With Credible, you can compare mortgage refinance rates from different lenders in minutes.
Investing directly in the stock market isn’t your only option. You might also choose to put extra money into your retirement account — a 401(k) or a Roth IRA, for example.
Retirement accounts have numerous benefits when compared to a more traditional stock market investment. Both a 401(k) and Roth IRA have tax advantages. With a 401(k), you can set aside money from your paycheck before taxes, and you won’t pay taxes on the investment or its gains until you take the money out. With a Roth IRA, you invest money after taxes, but you won’t pay taxes on the money you take out in retirement.
Keep in mind that both types of retirement accounts have limits on the amount of money you can contribute each year.
The decision is up to you, and there’s no one right answer. If your goal is to save more money for retirement, putting money in a retirement account may be better. If your goal is to have extra money available more quickly, a stock market investment may be preferable. If you’ve already reached your contribution limits on your retirement account, then a stock market investment is likely the way to go.
As you consider paying off your mortgage early or investing, be sure to weigh the pros and cons. Here are some benefits to putting extra money toward paying off your mortgage early.
If you decide to refinance your mortgage, check out Credible to easily compare mortgage refinance rates from various lenders.
There are some disadvantages to paying off your home early as well. Take the following drawbacks into account.
Choosing to invest extra cash has advantages. Here are some reasons to consider investing the extra money.
There are drawbacks to investing the money rather than putting it toward your mortgage.
Your decision on this matter will come down to your individual circumstances and your financial goals. This includes both the numbers and your own priorities. Here are some things to take into account.
Paying extra toward your mortgage versus investing doesn’t have to be an either-or decision. A good compromise might be to do both at once.
If you have a significant amount of extra money in your budget, you may choose to make a smaller extra principal payment and also put more money into a retirement account or other investment.
If your budget doesn’t have extra room now, you might consider refinancing your mortgage to a lower interest rate. If interest rates have fallen since you initially took out your mortgage, or if your financial situation has improved, you may qualify for a significantly lower rate on your mortgage. A lower mortgage interest rate translates to less interest paid over the life of the loan.
Even if you now have a lower monthly mortgage payment, you can still budget that same amount — just shift where the money goes. The money you save on your monthly payment can now go toward principal or an investment portfolio. Keep in mind, though, that if you refinance to a shorter loan term, your monthly payment will be higher and you may have less for an extra payment or an investment.
Before refinancing your mortgage, check your credit report and credit score. You can request a free copy of your credit report from each of the three credit-reporting agencies — Equifax, Experian and TransUnion — each year using a site like AnnualCreditReport.com. Lenders look at your credit score to gauge the risk of giving you a loan. Lower credit scores indicate a higher risk, and lenders will typically give you a higher interest rate. A higher credit score will mean you qualify for better interest rates.
Compare mortgage refinance rates from different lenders in minutes using Credible.
Quotes displayed in real-time or delayed by at least 15 minutes. Market data provided by Factset. Powered and implemented by FactSet Digital Solutions. Legal Statement. Mutual Fund and ETF data provided by Refinitiv Lipper.
This material may not be published, broadcast, rewritten, or redistributed. ©2022 FOX News Network, LLC. All rights reserved. FAQ – New Privacy Policy
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