Whether you have suddenly received a lot of cash or saved it over the years, you could be tempted to pay off your mortgage early.
But, is it a good decision would depend on many factors.
For instance, your interest rate, financial circumstances, and the years left to retirement would all make a significant difference.
If not paying off your mortgage, the other plausible option could be investing that money.
This article explores the better options, in general.
Paying Off The Mortgage Early
Some homeowners choose to pay off their mortgage early over investing. And the benefits generally vary depending upon the factors mentioned above.
For instance, retirees or people left with only a few years of employment may benefit from paying off their mortgage early. Of course, they wouldn’t want to carry any debt when not earning any employment income.
In other cases, someone who needs to free up their monthly cash outflow may find it beneficial to pay off the mortgage early.
Now, suppose you had a $200,000 loan for 30 years at an interest rate of 3.5%. The total interest that you would be paying in 30 years will sum up to $123,312.
However, if you could pay off your mortgage ten years before the tenure ends, you could end up with $20,270 in interest savings. Now, that could be great in achieving financial goals, other than just paying off your mortgage.
Investing In The Market
Considering investing the sum to pay off the mortgage early in the financial market may reap other benefits. For example, it can further help you grow your financial assets.
Generally speaking, the interest rate earned from an investment can be higher than the rate of interest paid on the mortgage.
Consider this scenario; If you could invest $100,000 for ten years at a rate of 2%, your earnings would be $22,019.
However, it is also noteworthy that there are other potential risks involved in investing your money in the financial market. It won’t be wrong to say that your net gain on investment would depend upon the interest earned and market risks involved.
Investment Gains Vs. Loan Interest Saved
Before moving forward, you must understand that investment return rates could vary mainly depending upon the market where you invest. Perhaps, there is no limitation to how much you can gain from the investment.
It could be as high as 100%, or it could be as low as no-gains at all.
That being said, you can compare the gains from an investment versus the savings from the loan.
The difference may not be much at lower gains. Still, as the gains percentage increases, the difference should grow more significant. And that is something you need to consider before paying off your mortgage early.
The Bottomline
In most cases, investing the money can prove to be more appreciative than paying off your debt early. However, your financial state would determine the best outcome.
It is better to talk to a financial advisory to understand your financial condition better and make the right decision for your future.