Every homeowner has likely asked themselves whether they should pay down their mortgage as quickly as possible, or invest. There’s no easy answer, as both can help increase your net worth over time.
1) Review your rate of return
With interest rates still at historically low levels and investment returns exceeding that number over the last few years, it may make more sense to invest in the market. Then again, markets can underperform, in which case the certainty that comes with paying off a 3% loan may be more attractive.
2) Take taxes into account
The ability to deduct mortgage interest on your tax return might incentivize you to invest. As of December 2017, you can deduct interest on loans valued up to $750,000. An accountant can help you determine how much that will save you, and if those savings make keeping the mortgage worth it.
3) Consider the penalties
Some lenders only allow you to pay off a certain percentage of a mortgage loan in a given year, or you will incur a hefty fee. However, once you pay off your mortgage, you may be able to put your money to better use in an investment or savings account. Keep in mind that you will need to pay taxes and fees on money that you withdraw from IRA and 401(k) accounts, so seeking guidance from your retirement and tax professionals is a good idea.
4) Understand your personality
If you can’t stomach debt, you’ll probably want to pay off your mortgage rather than invest. On the other hand, you may not mind putting your money in stocks and taking on additional risk. If the interest rate you’re receiving is comparable to the mortgage rate you’re paying, another safe option is to open a high-interest savings account or certificate of deposit.
Of course, you can also opt to do both and have it all: add a little extra each month to pay off your mortgage and deposit money in an investment account. You’ll have less debt and more savings in no time.
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