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Should I pay off my mortgage or invest?

Professionals with high incomes are often faced with difficult financial choices. One of the most common and difficult choices is whether to focus on paying off a mortgage. Doing so can remove one of the largest financial burdens most individuals face. Alternatively, investing in your future may seem a better idea than focusing on your mortgage. So, if you’ve found yourself having to make such a choice, which option makes more sense: pay off the mortgage or invest?

Investing in your financial future and tackling your largest debt are both worthwhile goals. But for most, the option of doing both at the same time simply isn’t on the table. Let’s go over the pros and cons of both financial decisions.

Paying Off Your Mortgage Instead Of Investing

If you’ve grown tired of carrying your mortgage on your back, you may be tempted to pay it off as quickly as possible.

The choice to do so always offers you financial benefits. But you reap greater benefits from aggressively tackling your mortgage earlier, rather than later.

How Your Mortgage Repayment Process Works

The typical mortgage is a 30-year, fixed-rate mortgage. If you have one, most of the money you pay in the earliest years of your mortgage goes towards interest. This money predominantly doesn’t go towards paying off your mortgage’s principal. That’s true for both conventional mortgages and government-backed ones. 

Nearing the end of your mortgage the opposite is true. If you’re in the latter third of the term of your mortgage, your repayments are going more towards paying off your mortgage’s principal.

Your principal is the amount of money you borrowed to pay for your home. Your interest is just what your lender charged you for borrowing money from them. When you’re making your monthly mortgage payments, your payments go towards:

- Your interest
- Your principal
- Homeowner’s insurance
- Taxes
- Mortgage insurance (when applicable)

By paying your mortgage off earlier, you’re reducing the principal on which you’ll have to pay interest down the road.

Likewise, opting to not pay more towards your mortgage during its later stages won’t reduce your interest burden as significantly.

Potential Cons Of Focusing On Your Mortgage

Dedicating your extra funds towards paying more of your mortgage off carries a positive result. But during the later stages of your loan, in particular, you’re missing out on an opportunity to build more wealth through investing than you’re losing to your repayments. And choosing to miss out on that opportunity can turn out to be the costly option.

You should also consider the factors that differentiate mortgages from other personal loans. 

Mortgage interest isn’t seen in the same light as other debt interest by the IRS. 

Should you itemize your deductions on Schedule A of your annual Form 1040, your mortgage interest is tax-deductible.

If you purchased your house before December 15th, 2017, you can deduct up to $1 million of your mortgage debt. If your house was purchased after, you can still deduct up to $750,000 of your mortgage debt. When it comes to dealing with the IRS, your mortgage interest payments can be helpful to your bottom line tax liability.

Adjustable-rate mortgages and other non-standard mortgages offer a few differences.

Paying more of your mortgage off, even if it’s later in the term, can be advantageous should your rate adjust. When your rate adjusts, your new monthly payments will be based on your mortgage’s current balance and interest rate. Also, if you build more equity in your adjustable-rate-mortgaged home, you will find it easier to refinance to a fixed-rate mortgage.

Another extra consideration to keep in mind is the potential for your neighborhood’s property value to depreciate. 

Even if the neighborhood’s home values are stagnant, paying off more of your mortgage is a good safeguard. In this case, you can ensure you don’t end up owing your lender more than your home’s value.

Holding Your Mortgage To Focus On Investing

When you invest, you’re not just fighting off debt. You’re building up your liquid assets. 

In many cases, this provides a better financial net gain than simply removing the burden of having a mortgage. The result is a better financial situation than if you had used your excess funds to pay off your mortgage. 

In the case that you can manage to maintain a 7% annual return on your investments, you’re doing fairly well with your investments. With such investments, you can often earn more money each year than you paid over your mortgage minimum payments. The more money you invest, the more likely you are to achieve a similar scenario. The main downside is that these gains typically come in overtime.

If you invest through a retirement account over the long-term, you are quite likely to end up with far more money than you would through focusing on your mortgage. There are, however, several scenarios in which prioritizing investing over mortgage repayments is too costly.

There are conditions under which neglecting your mortgage repayments to invest in a financially unsound choice.

In some cases, your mortgage repayment expenses will exceed your net profits from your investments. There are two cases in which you may lose out by prioritizing investing.

First, there are no guarantees your money will grow adequately through investing.

Index investing is a fairly safe bet, over an extended period. Short-term investments aren’t as likely to produce the long-term financial gains you’re looking for. That’s because short-term investments typically don’t provide your investments enough time to recover in the case of market downturns. But this leads to the second case…

Second, should your long-term investment profits fail to at least match or exceed your mortgage repayments’ sums, you’re losing out.

By paying off your mortgage, you’re actually guaranteeing yourself a lower financial burden going forward. When you’re nearing the end of your mortgage’s term, this is less apparent. But during the first few years of your mortgage, your money is predominantly dedicated to paying off your interest. Focusing on repayments at the beginning of your mortgage helps lower your financial burden going forward.

The Verdict: Mortgage Or Investing?

Your interest payments are the most sensible crux on which you should make your decision to invest or pay off your mortgage. According to financial planner Brian Fry, a good rule of thumb is:

If you stand to make more money through your investments than you pay in mortgage interest, it’s better to invest. But if your mortgage interest costs more than your investments’ net profits, it’s best to focus on your mortgage.

I wholeheartedly agree! Another option you have is refinancing your mortgage. If you can refinance your mortgage and achieve lower interest rates, you will have more financial leeway to focus on investing in your future. But a mortgage with interest that outperforms your investment profits creates a long-term financial loss. If your payments to your mortgage’s interest are that high, you should tackle your mortgage aggressively.

What If I Want To Tackle Both?

In many cases, you can come to a compromise between these two worthwhile goals. There’s nothing but your regular income:expense ratio stopping you from investing through tax-advantaged accounts while also paying a bit more towards your mortgage.

Your exact financial situation is unique. So, you’ll have to account for your own financial situation before you decide on whether to:

· Remove what mortgage debt you have left

· Invest for your future at the expense of your mortgage repayments

· Try to do both at once

Alternatively, you can hire a professional financial planner to help you come up with the best plan for you. 

Depending on how complex your current financial situation is, it can be quite difficult to make the choice that saves you more in the end. A dedicated professional, such as those at Cerebral Tax Advisors, can assess your finances and lead you down the financial path. That simply leaves you with more of your hard-earned money.

In any case, destroying your remaining mortgage debt and investing for your future are both noble goals. They both deserve time and consideration if you plan to achieve the best financial outcome.