Should I Pay Off My Mortgage or Invest in the Stock Market?
Your Investing Questions Answered
Welcome to the 2nd “Your Investing Questions Answered” Thursday.
Mike from Get Rich with Me asks;
“Am I better of making over payments on my mortgage at 2.9% or investing the money in the stock market?”
Should I Pay Down My Mortgage or Invest in the Markets?
This is a personal favorite of mine and a question I’ve pondered many times.
The short answer is, it depends.
This question is a financial and psychological question.
For some individuals, the freedom of having no mortgage is very important. For those individuals, there is a great satisfaction knowing that their home is paid off. My parents had the goal of paying off their mortgage, and they met that goal. The fascinating part was, after they paid off their mortgage, we discussed a version of Mike’s question, and my dad said to me, maybe I shouldn’t have paid off my 4% mortgage when market interest rates are 9%. My dad went on to discuss how by keeping his 4% mortgage and not paying it off, he could have used the extra cash to invest in a bond paying 9% and would have yielded a 5% (9%-4%=5%) profit.
This is an example of the trade off between paying off one’s mortgage or using the cash for investing.
Today’s situation is not so clear cut.
Today, interest rates are very low and future stock market returns are quite uncertain given the multi year bull market we recently experienced.
Consider These Questions Before Paying off Your Mortgage
Will you feel better if you get rid of your mortgage?
If the answer is yes, then you can stop right here and start paying off your mortgage.
We took out a 3.66% 15 year mortgage in 2012 with the idea that when retirement rolls around, our mortgage will be paid off. While we’re actively working, we prefer to have a mortgage for the tax benefit.
Do you Expect Future Stock Market Returns to Surpass 2.9%?
Since historical stock returns are in the 9% range, it would seem like a clear mathematical choice to hold on to the mortgage and put the extra cash into the stock market. Using the prior example, it appears as though your expected average return would be 9% – 2.9% = 6.1%.
Wait a moment, future stock market returns are uncertain. It’s a good idea to understand the volatility of stock market returns.
Do you know what stock market returns will be in the future?
No one knows future stock market returns.
Look at this S & P 500 chart from 1995 to December, 2013:
How will you feel if you use the money to invest in the stock market and the markets fall?
Imagine you decided to start investing your extra cash in the markets in 2000. For the next 3 years, your hard earned money would be worth less. In fact, you wouldn’t recoup your original investment for several years.
If you’re in your 20′s, 30′s, 0r 40′s and plan to dollar cost average into the markets over the upcoming decades, then your long term average returns are likely to surpass 2.9%. But there’s no guarantee and during that time there will be ups and downs in the investment returns.
Paying off your mortgage is a sure thing. Once it is paid off, you have no mortgage!
Do you need the tax deduction?
Are you able to itemize your tax deductions? If you’re a blogger or have a side business, you probably have some schedule C income (or loss). In general, the government gives us many ways to reduce our federal income taxes (contribute to a retirement account, small business deductions, home mortgage interest and property taxes). Keeping your mortgage longer may increase your total after tax income.
Do you have any credit card debt?
Pay off high interest rate debt first.
If you have any high interest rate debt; credit card, short term loans, or student loans, get rid of those first. It’s difficult to compound your wealth when you’re paying high debt interest payments.
Am I better of making over payments on my mortgage at 2.9% or investing the money in the stock market ?
Look at your own personal situation. Honestly answer the previous questions and decide if you are better off paying off your mortgage.
Only you can make the decision for yourself. By analyzing your own comfort with debt and how you will feel living in a “paid off” home you can make an educated decision.
Although you asked about investing the money in the stock market, it’s also wise to check out bond rates and see if you can improve on the 2.9% mortgage rate in a secure bond. Hint: the answer to this question will change with changes in market interest rates.
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Readers, what would you do in this situation, pay off your mortgage or invest in the financial markets?