Decide Whether to Invest or Pay Off Debt Using This Question
If you can do that, then paying off your mortgage early seems like a smart enough idea. But some choose to invest rather than spend money on outstanding debt at low interest rates. The idea is that if the interest rate on your debt is lower than the return on your investment, you come out ahead. Here’s an easy way to decide if this route is right for you.
We’ve already talked about how to balance investing with debt . While it’s always wise to take advantage of employer-selected 401k, other than that, things get tricky.
This post goes into detail on how to best balance these two goals, depending on your situation. And one of the options we mention is investing when you have a loan or debt at low interest rates. In particular, many people skip early repayments of their mortgages, preferring to invest for more profit.
In its 2015 investment guide , Forbes explains:
The main disadvantage of prepaying a mortgage is that it is a very illiquid investment. Once you have sent money to the bank, you cannot return it without refinancing. this will entail closure of expenses and possible loss of interest deduction.
Of course, the risk of going down this path is that, well, there is a risk. A buy and hold investment portfolio is pretty safe, but that doesn’t mean it is still immune to market ups and downs. On the other hand, the payment of the mortgage is guaranteed. You will have a smaller mortgage. To decide if you’re at risk, Forbes suggests asking:
Let’s say your mortgage has been paid. Would you take a $ 100,000 loan and invest the proceeds in stocks right now?
Of course, if you buy and hold, your portfolio will almost certainly recover over time. However, paying off your mortgage means reducing your debt; there is nothing indefinite about it. This question will help you decide which option is best for you.
Forbes – June 29, 2015 – Investment Guide 2015 – Special Edition: 137 Ways to Get Rich