Pay Your Mortgage Early or Start Investing? Your Choice Would Boil Down to this One Factor
So, you’ve bought a house and knocked off an item on the list of your long-term goals. Now, your next focus is paying off the mortgage you took out to afford your home.
But what about other financial goals like growing your wealth or saving up for retirement? If you’re wondering whether you’d be better off tackling your mortgage first or starting an investing habit, you might want to listen to the advice of certified financial planner Brian Fry.
For him, your decision should come down to interest rates. Putting things in simple terms, it’s better if you pay your house loan first if your mortgage rate is higher than what you’ll make investing your cash.
Best Things You Can Do
After running a simulation that considers various scenarios for a homeowner, Fry found that the best course of action you can take is to refinance your mortgage to a 15-year one at the interest rate of 3.19%.
This is because the rate of historical average stock market return is lower than the average mortgage interest rate. Thus, paying off your mortgage early after refinancing, which further drives down the interest rate, is the most sensible option for now.
Worst Things You Can Do
Meanwhile, Fry warned people against spending their extra money instead of investing. Doing so would not get you closer to your goal of building wealth.
He also reiterated the perks of refinancing your mortgage. Even if you aren’t planning on paying your house loan aggressively to be debt-free earlier, you’d still benefit from the lower rates you’d get by refinancing.
You can save a lot of cash as you’d be left with a significantly smaller monthly payment once you’ve been approved for a new mortgage. Fry said that refinancing is a particularly good option for homeowners that have no plans of moving any time soon.
Running the Numbers
The certified financial planner got to these conclusions after making calculations based on a scenario where a homeowner nets an extra $24,000 annually after taxes. The homeowner is already 15 years into their mortgage with over $282,000 left to pay off at a 5.84% interest.
The simulation assumed that the homeowner already has other aspects of their finances covered from paying off other debts to having an emergency fund. Another assumption is that they’ve diversified their nest egg as well.
That said, Fry notes that paying your mortgage early or investing shouldn’t be your top priority yet if you haven’t gotten your overall finances in order.
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