Do you currently own a house? Are you still making payments to the bank? Have you ever thought about making additional payments to get that loan paid off faster? What if you invested the money instead? Most people would not be asking these questions, and since you are, I can tell that you’ll be a great financial position very soon! Let’s explore the question, “Should we invest or should we pay extra on the mortgage?”
What If We Invest Our Extra Money Rather Than Pay Down the Loan?
I’ve received quite a lot of advice about how to handle our new home loan. Some say that instead of paying extra money toward my house, I could earn a higher yield in the market. While it is true that I would most likely earn more than a 3.75% (the current interest on our soon-to-be loan) in the market, I am not fully convinced that this is wise. Here is my reasoning:
- I do not like the idea of the bank owning my house for 15 years (we will have a 15 year loan). If I make all the payments for 14 years, but suddenly lose my job and can’t make any more payments, the bank still has the right to take my house away from me. I’d rather own it free and clear as soon as possible.
- While I may earn as high as 8% in the market right now, 8% of a small amount is a VERY small amount. Whereas, 3.75% of $70,000 is most definitely a lot! I suspect that paying down our house debt is wiser for security purposes, and for monetary reasons!
- There is no guarantee that the market will earn money. We’ve all seen the market go down, and it can certainly happen again. There is, however, a guarantee of a 3.75% “earnings” if I pay down my loan early.
Extra House Payment Scenario
After the down-payment, our home loan will total somewhere around $70,000. We plan on signing up for the 15 year loan, but the payments will still be quite low. I figure that we’ll be able to pay an additional $1,100 per month toward this debt, which will allow us to pay off the house in just under 4 years, saving us $16,273 in interest.
Investing Instead of Debt-Payoff
Now, what if we invested the extra $1,100 into the market and earned an average of 8% per year?
As you can see by the table above, even by earning 8% on your investment for 4 years, you still come up short of the $16,273 we saved by paying off the house early! Plus, you will still be paying off your house for the next 11 years! Sure, you have some money in the investments, but I’d much rather have a paid-for house.
Are You Saying I Shouldn’t Invest?
I’m not saying this at all. While paying off debt can avoid thousands of dollars in interest payments, it’s not always good to have all your eggs in one basket. The housing market could flop again, and so could the stock market. Spreading your money around is always a good principle, and I would suggest it for this scenario as well.
Personally, my wife and I are placing about 10% toward our retirement investment accounts, and the rest of our earning will be used to pay down the house. This way, we’ll have a nice next egg in the future, and we’ll have a fully paid-for house.
What do you think about this article? Did it surprise you that the investment did not surpass the interest savings? I’d love to hear your thoughts!