Is It Better to Pay Off Your Mortgage or Invest?
Paying off your mortgage is a very common financial goal. After all, it would feel pretty amazing to no longer send hundreds (even thousands) of dollars to the bank each month. While I do agree it would feel great to pay all of it off before the 30-year mark is up, I’m not doing it. Instead, I invest my money. Here’s why:
Why Prepaying Your Mortgage Isn’t Always Awesome
Prepaying my mortgage would increase my home’s equity, which is a good thing. 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.
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 couldn’t take out a home equity loan, but you will likely run into similar problems. During economic downturns, homes often take longer to sell than during booming economies, which means that it could take months to access the money that you need now.
You’ll also lock in any decrease in home value that occurred during the recession with no hopes to recover that money. You’ll have to find a new place to live and use some of that equity to pay for moving costs.
Investing May Be a Better Option for You
I invest instead of prepaying my mortgage because I believe that investing provides a better option for my money.
Investing allows me to access my money more easily if I need it in case of an emergency.
Like 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 economy, you can still sell them if you’re desperate enough for cash.
There is one more reason: You simply can’t break a bedroom or bathroom off from your home and sell it to access just a part of your home equity. But you can sell just a portion of your investments in most cases. Thankfully, I’ve never had to do that myself.
You Can Always Change Your Mind
My favorite part of investing rather than prepaying my mortgage 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 prepaying my mortgage in the first place, but I give up that certainty for the flexibility that investing provides.
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.
Interest Rates Matter
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 four percent. In 2006, a one-year certificate of deposit (CD) paid almost four percent interest, according to Bankrate. We could easily see those interest rates on CDs again during the course of a 30-year mortgage. Just imagine putting money in a CD that pays more than you pay in interest on your mortgage.
However, if I was taking out a mortgage today that had an interest rate of just six — or even eight — 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 four percent return on my invested money over the term of a 30-year mortgage, I’m not as confident that I could earn a six- or eight-percent return on my money over the same time period.
In the end, you have to do what’s right for your personal situation when it comes to prepaying your mortgage or investing. Know yourself, pick a plan, and follow through.