paying off house early vs investing for dummies
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Paying off house early vs investing for dummies stock investing for dummies basics

Paying off house early vs investing for dummies

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Still, if you're a homeowner with a mortgage , you've likely weighed the decision to pay it off early, if you can afford to. It's a worthy goal to be free and clear of all debt, but is it the right choice if you're trying to optimize your every dollar? He said the answer really depends on the specifics of the situation, but generally the biggest factor in deciding whether to pay off a mortgage early or invest your extra cash from a windfall, salary raise, or some other source is the interest rate.

Here are his high-level recommendations. Scroll down for the full set of assumptions he used. If the rate on your mortgage is higher than what you might make by investing the cash, it's often better to pay down your debt before investing more, Fry said. That is, unless you consider refinancing to secure a lower rate, he said. In fact, refinancing can be a good option whether or not you ultimately decide to pay your mortgage aggressively.

Interest rates fluctuate and they're currently at historic lows , so be sure you shop around before making a decision or running your own numbers. But Fry said it's also crucial to look at how far you are from retirement, how long you plan to stay in the home, whether you have other high-interest debt, the possibility of tax deductions , and the status of your emergency fund and retirement savings.

There are non-financial factors to think about as well. And if you need help, a fee-only financial planner can be a great resource, he said. To help illustrate the debate between paying off your mortgage early versus investing, we asked Fry to run a simulation. Below are the assumptions he used:. They plan to stay at this job, and it's unlikely they'll get any more raises or cost-of-living adjustments.

This figure was used for the purposes of this calculation; a smaller raise or windfall would yield similar results. They have an established emergency fund and no other debt, and they're already maxing out their k and IRA. They plan to stay in their home forever and retire in 15 years, at If they refinance to a year fixed mortgage, their interest rate would be 2.

Generally, refinancing costs are 1. Their nest egg is diversified, and they are looking to make the best financial decision about how to use the extra income to maximize their wealth. Do they use this extra money to pay off their mortgage more aggressively, or invest more aggressively? Fry used Right Capital, a financial-planning software, to calculate how much the homeowner would have in a taxable investment account in 15 years using a straight-line analysis.

The variables are whether they refinance their mortgage, and whether they put their additional income and savings from refinancing, if available into an investment fund or put it toward their loan balance. He said it's important to remember that the market doesn't go up by the same percentage every year: Some years offer better returns, while others may have negative returns. Disclosure: This post may highlight financial products and services that can help you make smarter decisions with your money.

We do not give investment advice or encourage you to adopt a certain investment strategy. What you decide to do with your money is up to you. If you take action based on one of our recommendations, we get a small share of the revenue from our commerce partners. This does not influence whether we feature a financial product or service. We operate independently from our advertising sales team. Read our editorial standards.

Back to Top A white circle with a black border surrounding a chevron pointing up. It indicates 'click here to go back to the top of the page. Credit Cards Angle down icon An icon in the shape of an angle pointing down. Investing Angle down icon An icon in the shape of an angle pointing down. Insurance Angle down icon An icon in the shape of an angle pointing down. Savings Angle down icon An icon in the shape of an angle pointing down. Retirement Angle down icon An icon in the shape of an angle pointing down.

Don't pay so much toward your higher-interest debt that you risk defaulting on mortgage payments, though. Yes, credit cards can be expensive , and the issuer may take legal action if you default on card payments. But defaulting on mortgage payments can be an even bigger risk, because you could lose your home.

There's no clear right or wrong answer about whether or not you should pay off your mortgage early. It depends on your situation and your personal goals. Use our free mortgage calculator to see how paying off your mortgage early could affect your finances.

Plug in your numbers, then click on "More details" for information about paying extra each month. By putting a few hundred dollars toward your mortgage per month, you could own your home in full years sooner. Disclosure: This post may highlight financial products and services that can help you make smarter decisions with your money. We do not give investment advice or encourage you to adopt a certain investment strategy.

What you decide to do with your money is up to you. If you take action based on one of our recommendations, we get a small share of the revenue from our commerce partners. This does not influence whether we feature a financial product or service. We operate independently from our advertising sales team. Read our editorial standards. Back to Top A white circle with a black border surrounding a chevron pointing up.

It indicates 'click here to go back to the top of the page. Credit Cards Angle down icon An icon in the shape of an angle pointing down. Investing Angle down icon An icon in the shape of an angle pointing down. Insurance Angle down icon An icon in the shape of an angle pointing down. Savings Angle down icon An icon in the shape of an angle pointing down. Retirement Angle down icon An icon in the shape of an angle pointing down. Mortgages Angle down icon An icon in the shape of an angle pointing down.

Loans Angle down icon An icon in the shape of an angle pointing down. Taxes Angle down icon An icon in the shape of an angle pointing down. Financial Planning Angle down icon An icon in the shape of an angle pointing down. Many or all of the offers on this site are from companies from which Insider receives compensation for a full list see here. Advertising considerations may impact how and where products appear on this site including, for example, the order in which they appear but do not affect any editorial decisions, such as which products we write about and how we evaluate them.

Personal Finance Insider researches a wide array of offers when making recommendations; however, we make no warranty that such information represents all available products or offers in the marketplace. Personal Finance.

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Sometimes you just have to play to your psychology. Sounds like you have a plan. I would definitely make it a priority to get those pre-tax accounts maxed out. Totally understand about not wanting to have the burden of debt. I am not opposed to leverage, but only when I need it and only to a certain point. Right there with you.

But considering things are how they are, your approach seems spot on. And I am sure this will not be the last post on the top looking at it from different angles. Next one up will be the benefits of accumulating the cash in savings and paying the mortgage off in a lump sum vs making the extra payments along the way. I have a strong bias towards accumulating savings because of the liquidity.

We never know when a setback is around the corner job loss, change in health, etc. If you face a cash crisis, the mortgage company still wants the next payment — even if you are years ahead of the repayment schedule. It is far easier to manage inevitable life challenges with a comfortable cushion in savings. But this is definitely a risk in this strategy. There is certainly a chance in the future that I will stop making the extra payments to the bank and instead just accumulate the money in savings until I can make one lump sum payment.

But for now I will stay the course. I paid off my first house in — it took me five years. For my second house, I bought in and paid it off in a couple years. The mortgage rate was much higher then and I had no regrets whatsoever. Great analysis. I always was curious to know what difference it would make between paying off mortgage early vs invest. Of course it would really depends on the market at the time but it helps me see the picture.

Maybe balancing out would be a great idea e. So true that it all depends on the market. I personally think that the market is going to average very meager returns over the next 7 years. Either way I will have a house free and clear. Also like you mentioned it might be good to balance this out with contributing to tax deferred accounts. That is exactly what I am doing. I also have plans to make other investments utilizing after tax accounts as well.

Great post and great timing. I have been looking the past 2 weeks into speeding up the mortage payment of our house. In Belgium, the rules a simple: there is a house bonus that is tax dedcutible: you can count interest and principal payments to a max og EUR.

Then, you get around pct of that refunded. In my current situation, only my wife has this bonus, thus limiting the tax advantage. But it is still a sweet deal: from now till the end date of the mortage, we have more advantage than interest to pay. So, why pay the mortage faster? On the other hand, I am thinking like you: the long term average return of the markt is far lower then where we are today.

And I also believe in mean reversal. So, something should happen. What and when: no clue. Here is my current approach: Fill up each month the tax advantage savings, pay the mortage in a normal way and cash up everything else. By the end of this year, this cash will be used to either lower the outstanding mortage or will be used to profit from the mean reversal.

Either way will make me happy. Reasons to lower the mortage: I will be truely debt free sooner or I will pay less per month We ca choose this when paying back a lump sum. This will give me more options going forward, and creating options is my final goal: have the freedom to choose between alternatives. It sounds like the house bonus is similar to our interest tax deduction here in the states. But from what you write, it sounds like you get a benefit on both the interest and principal paid.

I have gone back and forth on whether or not to pay my 2. At this point, I have shifted back to investing more. Given my average size mortgage, I am not far from just taking the standard deduction on my taxes anyway. Right now my plan is to pay it off once I retire in 7 years so that my FI savings can grow in the meantime.

Good post! Wow, very detailed post! I struggle with the question of paying off my mortgage entirely or making extra payments and pay it off early. I personally want to keep investing every penny I have and not pay off my mortgage for now. It definitely is a very personal decision, and I guess each person has their own ideas of how the mortgage should be handled.

Man loving your line of thoughts here! Not sure if you guys have that in the states? Late to this article but wanted to toss my hat in anyway. I treat my mortgage as an investment vehicle when I objectively see the market is in a bubble. Building the mortgage into an investment strategy to substitute for conservative vehicles like bonds is a great risk mitigation tool. Your email address will not be published. Save my name, email, and website in this browser for the next time I comment.

Notify me of follow-up comments by email. Notify me of new posts by email. This site uses Akismet to reduce spam. Learn how your comment data is processed. The interest based on the original 30 year amortization schedule. The actual interest paid during the 7 year accelerated pay down plan.

The interest savings between the 30 year pay down vs. And finally the net savings between the interest savings and the increase in taxes of 7 years. Questions that we need to ask ourselves regarding the tables above What about any appreciation that occurs on your house? What is the break even market return to make the opportunity cost zero? Wow, you read my mind…oh wait, these are questions from my own head.

Either way, I did the math and calculated the break even return rate. If the market return averages 1. However, the 3. What about the psychological win of paying of your mortgage early and the options that it affords you? This can be a very personal decision.

I think it gives you the courage to make decisions that you could not make when you have to make sure the mortgage is paid. What about the savings from the remaining 23 years on the mortgage? What is the present value of that? Yes, I do think we should at least note the present value of the interest savings over the 23 years. The question is what should the discount rate be?

What is the dollar and cents conclusion over the short term? This is for you Even Steven… Scenarios Definitions Scenario 0: In this scenario I would invest the money I had planned to apply to the mortgage in order to pay it off in 7 years. I personally think I will fall somewhere in between scenario 2 and scenario 3.

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Sorry, your blog cannot share posts by email. They have an established emergency fund and no other debt, and they're already maxing out their k and IRA. They plan to stay in their home forever and retire in 15 years, at If they refinance to a year fixed mortgage, their interest rate would be 2. Generally, refinancing costs are 1. Their nest egg is diversified, and they are looking to make the best financial decision about how to use the extra income to maximize their wealth. Do they use this extra money to pay off their mortgage more aggressively, or invest more aggressively?

Fry used Right Capital, a financial-planning software, to calculate how much the homeowner would have in a taxable investment account in 15 years using a straight-line analysis. The variables are whether they refinance their mortgage, and whether they put their additional income and savings from refinancing, if available into an investment fund or put it toward their loan balance. He said it's important to remember that the market doesn't go up by the same percentage every year: Some years offer better returns, while others may have negative returns.

Disclosure: This post may highlight financial products and services that can help you make smarter decisions with your money. We do not give investment advice or encourage you to adopt a certain investment strategy. What you decide to do with your money is up to you. If you take action based on one of our recommendations, we get a small share of the revenue from our commerce partners.

This does not influence whether we feature a financial product or service. We operate independently from our advertising sales team. Read our editorial standards. Back to Top A white circle with a black border surrounding a chevron pointing up. It indicates 'click here to go back to the top of the page. Credit Cards Angle down icon An icon in the shape of an angle pointing down. Investing Angle down icon An icon in the shape of an angle pointing down.

Insurance Angle down icon An icon in the shape of an angle pointing down. Savings Angle down icon An icon in the shape of an angle pointing down. Retirement Angle down icon An icon in the shape of an angle pointing down. Mortgages Angle down icon An icon in the shape of an angle pointing down. Loans Angle down icon An icon in the shape of an angle pointing down. Taxes Angle down icon An icon in the shape of an angle pointing down.

Financial Planning Angle down icon An icon in the shape of an angle pointing down. Many or all of the offers on this site are from companies from which Insider receives compensation for a full list see here. Advertising considerations may impact how and where products appear on this site including, for example, the order in which they appear but do not affect any editorial decisions, such as which products we write about and how we evaluate them.

Personal Finance Insider researches a wide array of offers when making recommendations; however, we make no warranty that such information represents all available products or offers in the marketplace. Personal Finance. Share icon An curved arrow pointing right. Twitter icon A stylized bird with an open mouth, tweeting.

Twitter LinkedIn icon The word "in". LinkedIn Fliboard icon A stylized letter F. Flipboard Link icon An image of a chain link. It symobilizes a website link url. Copy Link. A financial planner's recommendations The bottom line: Look at interest rates Methodology.

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Should You Pay Off Your Mortgage Early or Invest?

Interest savings: The benefit of paying off your mortgage early. Mortgage prepayment advocates focus on how much interest you won't be charged. Whether paying off the mortgage early is optimal can depend on the borrower's financial situation, the loan's interest rate, and how close they are to. From a financial perspective, it's usually best to invest your money rather than funneling extra cash toward paying your mortgage off faster. Of.