Where should my money go? When you’re paying off your home, this is a valid question to have. Often, new homeowners aren’t sure whether to put all their money towards their mortgage or split it up and invest as well. Today’s article outlines some key points you should consider for both paying early and investing.
When To Pay Off Mortgage Early
You may have extra cash because of various circumstances and aren’t sure where it should go. We understand that the day you don’t make mortgage payments anymore will be a monumental one.
There are a few reasons people choose to pay off a mortgage early. The first benefit is that you will have greater financial freedom sooner. Knowing you don’t have to make any more payments can benefit one’s overall mental health. Additionally, you can use your money for other things, such as saving for retirement or planning the next big purchase.
The next reason is to save money on interest. One way to pay off your mortgage faster is through lump-sum payments. In essence, you contribute a large, single payment instead of instalments. Paying off your mortgage early can also build equity.
While there are many benefits, it’s important to consider the drawbacks. With that said, consider what other debt you have. Make a list of everything you are currently paying off to help you get organized.
Current housing market interest rates are low. You might be paying off a new car or have student loans on top of your mortgage. These types of debt could have interest rates higher than your mortgage. You may want to hold off on putting all extra funds toward your home. Prioritizing other forms of debt could also help you save on interest in the long run.
Although you may have extra cash now, that may not always be the case. Never put all your money toward your mortgage at the expense of emergency funds. You should leave rainy day funds untouched.
When To Invest
Next, let’s take a look at what it means to invest your extra money. This will depend on where you choose to invest. Investing in stocks gives you more financial freedom than if you were to put it towards your mortgage. In other words, you can sell or move funds you invest, but you can’t take money out of your mortgage without refinancing.
You could also sell your stocks and put that extra money toward your mortgage for the best of both worlds.
Of course, there is always a risk when investing in the stock market. You must be willing to take risks when investing because there is no guarantee. Ask yourself whether investing is something you see yourself doing for the long haul or if you’re looking to make quick extra cash. Ultimately, this depends on your risk tolerance.
If you prefer a low-stakes approach, it’s important to ask yourself how much you’re willing to invest. With long-term investing strategies, such as a mutual fund or an ETF portfolio, you could potentially see more returns from compound interest than your mortgage interest rate.
Lastly, investing will be more work than paying your mortgage. For your mortgage, you simply put more funds toward it. However, with the stock market, you will need to carve out more time researching and paying attention to fluctuations if you don’t already do so.
If you’re hoping for a lower rate or change your mortgage type, you may want to refinance your mortgage. Refinancing can also help you access the equity in your home. However, be sure to check the penalty fee first.
A refinance means breaking and starting a new mortgage. You can either get a new lender or stay with your current one. By getting a lower rate, you can help speed up the payment process. You can save on interest rates and also pay off your home faster. In turn, you could use the money you save and put it towards investments.
The money you choose to invest won’t be going toward your home at the end of the day. You’ll still have your mortgage to pay off if you spend all your extra cash in the stock market. Therefore, we suggest being strategic with your funds. Split your money in both directions.
For those who prioritize shorter-term and low-risk scenarios, put more funds toward your mortgage. If you’re looking for something long-term, consider adding more money towards a tax-exempt investment account. If you’re not sure what ratio to do this in, consider speaking to a mortgage broker.
Working With A Mortgage Broker
Paying off your mortgage sooner means you won’t have to worry in the future. However, you might have other forms of debt that also need attention. Having investments provides flexibility in where and how you divide your money. With that said, there’s no guarantee with the stock market, and you should consider how big of a risk-taker you are.
If you’re still unsure how to handle your mortgage or what your options are, talk to a mortgage broker. They can provide personalized advice that best first your needs, budget, and lifestyle. For example, you could qualify for a refinance. In addition, perhaps you are interested in other forms of investments. Investing in real estate could be another option you could discuss with your mortgage broker.