Paying off your mortgage early vs. Investing in the Stock market
If you have ever wondered if you are better off paying off your mortgage early, you are not alone. Many people including yours truly have wondered if it is better in the long run to pay off your mortgage instead of investing in the stock market.
I have come to the conclusion that it truly depends on your time horizon. If you have a long investment horizon, and your mortgage rate is low, investing in the stock market is the way to go. Paying off your mortgage gives you a return of the interest rate that you would pay having the mortgage, i.e. if your mortgage rate is 6%, than your return for paying the mortgage off early is 6% as you are saving that interest on the principal over the term of the loan. You have to bear in mind also that if you pay off the mortgage you lose the mortgage deduction on your federal taxes. You also lose the leverage that real estate provides you. No one I know put 50% down on their homes, the most they put down for a payment was about 20-25% to avoid PMI. The rest was a loan from the bank or Mortgage Company. Furthermore, Real Estate is not the most liquid of assets. If you were to pay off your mortgage and somehow got yourself in a financial pickle, you may not be able to sell your house quickly. You could get a loan against it, but that would bring you back to where you started before you paid off your mortgage.
I understand that investing in the stock market with so many uncertainties like we have now is not easy. The fear of inflation, subprime fears, and geopolitical fears do not make investors sleep easy. But investing in the Stock market for the long term is the best way to creating wealth in the long term. So if you are not retiring in the next few months or years and do not have better alternatives to your money, don’t pay off your mortgage but invest your hard earned dollars in the Stock market and let the power of compounding do its magic over time.
Paying off your mortgage early vs. Investing in the Stock market
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3 comments:
I found your blog from your post on the Fool and thought I'd post an interest rate calculator. It can be found
here.
It tells you your real interest rate based on your taxes. If you can get a better return on your investment than the "Effective After-Tax Loan Interest Rate" it calculates, then you would be better off investing the money than paying off your mortgage early.
Also, one thing to consider is what would happen if you default on the loan and lose the house. In that case, you lose any extra money that has gone towards the loan. From what I've read, it's better to save the money and only pay the home off when you have enough saved to cover the entire outstanding amount of the loan.
Good article. You need to write more.
Paying off your mortgage might be more attractive now, given the economic downturn.
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