Are you debating whether to pay off your mortgage or invest with your extra money? Here are some of the most important factors you should consider:
1. Your Mortgage Interest Rate
Your mortgage interest rate is essentially the price to pay for your mortgage. The higher your rate, the more expensive your loan. As a result, it’s one of the most important factors to consider when deciding whether you should pay off your mortgage early or invest.
2. Home Appreciation in Your Area
When you’re weighing your options of whether to pay off your mortgage or invest, it’s often about weighing your mortgage rate against your potential investment returns. But it’s also important to consider how quickly homes appreciate in your area. After all, that could impact which option has the best payoff.
3. Your Income Tax Rate
Both investing and paying off your mortgage have tax benefits. The interest you pay on your mortgage is tax-deductible. But so are contributions to many retirement accounts. Depending on your income tax rate, it could be beneficial to combine the two tax benefits for as many years as possible.
4. Expectations for Inflation
The Federal Reserve has a target inflation rate of 2% per year. And for your wealth to grow, your returns need to exceed the inflation rate each year.
Inflation tends to work in your favor when it comes to paying off debt. That’s because the principal you pay back decades down the road is worth less than the same amount you borrowed. But inflation works against you when it comes to growing wealth. And that’s because inflation erodes the value of your savings and investments.
5. Your Risk Tolerance
Regardless of what the math says, the right answer won’t be the same for everyone because people have different risk tolerances. When it comes to paying off your mortgage, there’s no interest rate risk as long as you have a fixed-rate mortgage.
Your true risk of prioritizing your mortgage comes in the opportunity cost of not using that money for something else. You know what you’ll save by paying it off early. Investing on the other hand always carries some risk of losing your money.
6. Your Financial Situation
Any time you make a big financial decision, it’s important to look at your entire financial situation. Look at all the factors.
- How much do you have in savings?
- How much wiggle room do you have in your monthly budget?
- Your financial goals.
- Do you have other higher-interest debt?