Pay Off Your Home or Invest the Money? I Propose a Compromise
There are strategies for paying off your home early.
Those strategies are great and they work.
But is it worth it to pay off your home early?
With mortgage rates being so low, why not invest the extra money instead of paying off your home?
I really don’t think you have to pick. I think you can do both.
If you want to pay off your home early, this may be the best strategy for you.
Let me explain…
Meet in the Middle
I haven’t read about this strategy before, so I am just going to claim a name!
I am calling it “meet in the middle”.
For this article, we will refer to these two crowds as the “OCD Investors” and the “Debt Haters”.
The “OCD Investors” think, with mortgage rates being so low, you can earn more money by investing than you can save by paying off your mortgage early.
The “Debt Haters” think, as long as you have a mortgage, you are in debt. And they hate debt (hence the name).
So, who’s right? Both of them.
Can’t We All Just Get Along?
I have devised a plan.
A plan to unite OCD Investors and Debt-Haters everywhere.
It’s as simple as investing the extra money you would be putting towards your home.
Keep steadily investing until you accumulate the amount that you owe on your home.
Or, in other words, until you meet in the middle.
To start, just figure out how much you can contribute each month and start investing.
Make sure to use a separate account from all your other investments.
If you can’t afford the fund you want, start with a mutual fund that has a smaller initial investment, then keep upgrading once you have enough for the fund you want.
Once your investment is worth the amount you owe on your home, pay it off.
Is This the Best Mortgage Strategy?
This is only the best method if you can get a high enough return on your investment to earn more by investing than you would save by paying extra on your mortgage.
Usually this strategy wins, because you should be able to get a low mortgage rate right now and your return on some good basic index funds should yield a high return.
To calculate your situation, you need to figure out:
- Your available amount to invest
- Your mortgage interest rate
- Your specific tax situation
Simple Steps: Once you know how much you can contribute, use this calculator to see how many years and how much money you would save by paying extra on your mortgage. Then use this calculator to see how much you could realistically earn by investing.
This strategy works great for some, but not for others.
For example, if you’re interest rate is really high, you may want to refinance. If you can’t refinance for some reason, it may be more beneficial to pay extra on your mortgage.
The thing about this strategy is that it works extremely well for those who are in the right situation to make it work.
There are many variables, especially interest rates and taxes…
Watch Out for Uncle Sam
Obviously, it wouldn’t be worth your time to invest all this money, only to pay high taxes when you withdrawal to pay off your mortgage.
There are some ways to accomplish this strategy tax-free…
If you will be over 59 1/2 when you pull the money out, you can put it in a Roth IRA (if you meet the requirements).
If you are in the 10% or 15% tax bracket (USA), you pay 0% long-term capital gains taxes (long-term means gains on assets held for longer than 1 year).
Of course, tax brackets can always change, but they will most likely remain very low for the bottom tax brackets.
If you don’t have any options for tax breaks, you may have to do some more math. If you’re in a higher tax bracket, it may benefit you more to simply pay extra on your loan.
Just make sure it makes sense when you calculate your rate-of-return, taxes and interest rates.
Every situation is different.
This strategy is not for everyone.
You may not be able to make this method work.
Calculate the costs. If this method doesn’t make sense for you, you will have to choose a side, my friend.
“Debt hater” or “OCD investor”.
Figure out what is more important to you. Being debt free or creating the most possible wealth.
There is no right answer. It’s about your priorities.
If you’re not sure whether this makes sense for your situation, just leave a comment or send me a message. I would be more than happy to run your numbers.
Will this work for you?
What are your thoughts?
Share in the comments!
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