Here’s a question we get often when we meet with clients. Is it better to pay down your mortgage, or invest the extra money?
Let’s look at paying down a mortgage with extra cash. For example, say you just started a 15-year, $300,000 mortgage at a 3.00% interest rate. If you make one extra $10,000 payment at the end of each year, you’ll 5 eliminate 5 years of the total mortgage term and you’ll have the house paid for in 10 years! By eliminating those last 5 years, you’ll save about $24,000 in interest!
The other option is taking that $10,000 each year and investing it in the stock market. Let’s assume a conservative 6% rate of return each year. That $10,000 saved for 10 years, for a total of $100,000, could turn into almost $132,000. That’s earnings of $32,000.
In this example, investing the extra cash gives you more money in the long run than paying down a mortgage. Though it varies person to person, we’ve seen mortgage rates around 3% for the past couple of years. When you can borrow money at such a low interest rate, it makes the earning potential of the stock market so much more attractive.
However, it’s not bad to pay off a mortgage early, and it’s excellent to have your house paid off going into retirement. Let us know if we can help you look at different scenarios of what to do with extra cash.