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What’s Better Financially: Paying Off Your Home Mortgage or Investing That Money?

By Jhon Doe 18th Oct 2016

The best way to look at it is to look at your advance mortgage payments as an investment with a certain rate of return – a rate equal to the interest level on your mortgage. So, if you have a mortgage at 5.75%, an advance payment on that mortgage is basically an investment of that money at a 5.75% annual return. Most importantly, though, one should look at these returns as being after taxes

The other factors that influence the decision making process are:
  • The variability of the market: Past performance is never an indication of future returns. You can never just assume the stock market will do what you want. The next ten years could be utterly painful on Wall Street, or we could see another economic boom.
  • Flexibility: With the money in a taxable investment account, it is accessible if I ever need it. If I prepay on the mortgage, the only way that money is accessible is if I take out a home equity line of credit.
  • Self determination: This is a lesser concern, but still significant. Having a significant amount of money just sitting there in an investment brings forth a desire to spend it. Certain willpower to resist such a situation can proof to be advantageous.

To recapitulate, the higher your mortgage interest rate is, the better it is to pay in advance instead of investing it. Where’s the cutoff line? It depends on a lot of things, but the big one is your risk tolerance – if you’re fine with a possibility and prospect for a down market in exchange for a very good chance of being able to pay things off earlier. Prepaying on your mortgage is very steady and reliable, but investing gives you the anticipation to hit a real home run and become debt free earlier than you thought possible..

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