Paying off your mortgage is a very common financial goal. After all, it would feel amazing to no longer send hundreds (even thousands) of dollars to the bank each month. While I do agree that paying off my mortgage early would feel liberating, I’m not doing it. Instead, I invest my money.
Why Paying Off Your Mortgage Early Isn’t Always a Safe Bet
Paying off my mortgage early would increase my home’s equity, which is a financial plus. Unfortunately, you can’t guarantee that you’ll be able to access the equity in your home should you need it in a bind.
Tools such as home equity loans do exist to allow you to borrow against your equity, but they may not be readily available when you need them. During recessions, many banks tighten their lending standards, so even people with great credit may not qualify for a variety of reasons.
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“A recession can cause the tightening of home equity lines of credit,” says Certified Financial Planner Adam Beaty. “This was a major problem in 2008, when home equity lines were canceled, frozen, reduced, or modified as the lender saw fit.”
Other common problems with accessing equity could include your home value decreasing, erasing the equity you prepaid, or losing your job and not qualifying to take out a loan.
You could always sell your home if you can’t take out a home equity loan, but you will likely run into problems on that front, too.
During economic downturns, homes often take longer to sell than during booming economies. This means that it could take months to achieve the liquidity that you need now.
You’ll also lock in any decrease in home value that occurred during the recession with no hope of recovering that money. You’ll have to find a new place to live and use some of that equity to pay for moving costs.
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Investing May Be a Better Option for You
I invest instead of paying off my mortgage early because I believe that investing provides a better option for my money. It allows me to access my money more easily if I need it in case of an emergency.
As with accessing the equity in your home, accessing your investments may not always come at the best time. While the value of your investment can decrease drastically during a rough patch in the stock market, you can still sell your financial instruments on the market if you’re desperate enough for cash. That is, of course, assuming there is a buyer on the other end, rarely a problem with common stocks and bonds.
There is one more reason: You can’t simply break a bedroom or bathroom off from your home and sell it to access a part of your home’s equity.
But you can sell a portion of your investment portfolio in most cases. Thankfully, I’ve never had to do that myself.
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You Can Always Change Your Mind
My favorite part of investing rather than paying off my mortgage early is that I can change my mind down the road. At any time I wish, I can sell my investments and use that money to prepay my mortgage.
There is no guarantee that I’ll come out ahead by investing now instead of paying off my mortgage early in the first place, but I give up that certainty for the flexibility investing provides. It’s important to understand the value of being able to access your cash if you suddenly need it.
“There are a lot of people that utilize their home equity line of credit as an emergency fund,” states Brandon Lambert, a certified financial planner. “I discourage people from doing this every chance I get.”
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“Imagine having an emergency that costs you $15,000. Would you rather be able to write a check and pay for that emergency upfront, or have to borrow your own money from the bank to pay for it?” Lambert adds.
You can’t undo prepaying your mortgage. The best that you can do is take out a home equity loan or refinance your mortgage to gain access to the cash that you put into your home each month.
Should You Pay Off Your Mortgage Early or Invest? The Interest-Rate Factor
My argument for investing rather than prepaying your mortgage could change if we were in a different interest-rate environment. Currently, mortgage rates are near all-time lows, with 30-year mortgages often offering interest rates of below 4 percent.
However, if you’re taking out a mortgage today with an interest rate of just 6 — or even 8 — percent, the decision becomes a more personal one based on your risk tolerance and circumstances. While I believe that I can earn more than a 4 percent return on my invested money over the term of a 30-year mortgage, I’m not as confident that I could earn a 6 to 8 percent return on my money over the same time period.
In the end, you have to do what’s right for your money — and preference for financial risk — when it comes to deciding between paying off your mortgage early or investing. Know yourself, pick a plan, and follow through. That starts with knowing the fundamentals of both your mortgage and investing to make the best decision.
Additional reporting by Connor Beckett McInerney.