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Mortgage or Investments: Deciding Where to Put Your Money for Long-Term Financial Success

Mortgage or Investments: Deciding Where to Put Your Money for Long-Term Financial Success

| March 15, 2024

In finance, the golden rule is simple: earn more than you spend. However, after years of careful budgeting and hard work, you might find yourself with a surplus of money each month. Now the big question arises: What’s the best way to make use of it?

Leaving it sitting idle in a savings or checking account hardly seems wise when there’s potential for greater returns through investing. Naturally, you want to make your extra cash work for you. When caught in this situation, many people find themselves grappling with two main options: paying down their mortgage or putting the cash into investments. It’s a tough call for many, so let’s break down the perks of each approach.

What Makes the Most Financial Sense?

When deciding between these two options, you first want to know which option can provide the greatest payoff. In this case, it’s your mortgage rate versus your expected investment return. You can calculate some rough estimates to evaluate which decision would make more financial sense.

Let’s consider an example. Say your mortgage interest rate is 5%. If you estimate that, based on your risk tolerance and time horizon, you can expect an investment return of 4%, it would make more sense to pay down your mortgage. Otherwise, you’re potentially throwing away 1%. However, if you are an aggressive investor and believe you could earn 8% on your investment, it would make more sense to invest. 

This may sound simple on paper, but there are a lot of factors at play. And as we all know, even the best of predictions aren’t set in stone. It’s important to run a thorough analysis and factor in taxes on investments, mortgage interest deductions, risk, and private mortgage insurance, among other elements of your financial life. An experienced wealth advisor can run all of the calculations and do a complete analysis of your unique situation.

The Pros and Cons of Each Option

There are some pros and cons to each that go beyond the raw math. Liquidity is one big pro for investing. You’ll have easier access to it in case of an emergency. However, if you put the money towards your mortgage, it’s gone, for all intents and purposes. The only way to get the money back out is to sell your house or refinance your mortgage.

However, an advantage of paying down your mortgage is that your house will be paid off sooner. You will have a greater chance of being able to enter retirement without a mortgage, or at least have your mortgage paid off sooner during retirement. That way you can free up more of your money before your medical expenses start to build. 

Another benefit of paying off your mortgage completely is decreasing your risk. Once you own your home free and clear, you never have to worry about a foreclosure or having your credit damaged by missed mortgage payments. However, you still have to pay your taxes and homeowners insurance and carry some risk of having a lien placed against your property. 

Choosing a Combination of the Two

For some people, it may make more sense to choose a combination of these two options. For example, if you have less than 20% equity in your property, you may be required to pay private mortgage insurance, meaning you owe additional premiums on top of your mortgage principal and interest payments. 

In this case, even if your mortgage rate is 5% and you can earn 6% on an investment, you may still earn a higher return on your money by paying down your mortgage. Once you pay it down to at least 80%, then you free yourself of needing private mortgage insurance and then you can start investing, should you determine that that’s a more appropriate option for you.

How I Can Assist

This serves as a basic outline of the decision-making process, but there are additional considerations to weigh before reaching a conclusion and implementing a plan. My goal is to assist you in making informed choices about your finances specific to your situation. With experience in guiding families, our team at Horizon Planning Group has guided many of our clients who grapple with decisions similar to this one. 

To discover how I can support you in determining the ideal return on your investment, schedule an introductory meeting online or reach out to me at (770) 627-4157 or Scott@MyHorizonPG.com to get started. 

About Scott

Scott Bechely is a financial advisor at Horizon Planning Group, a full-service financial planning team committed to always doing what’s right for their clients. Scott uses his more than 15 years of experience to help his clients create a retirement income plan that aligns with their goals and helps them live the retirement lifestyle they dream of. He believes that everyone should have a chance to obtain financial independence, and he strives to help his clients design a plan that helps them sleep better at night knowing they’re on track for their ideal future.

Scott is a CERTIFIED FINANCIAL PLANNER™ professional who graduated magna cum laude from the University of Georgia with a bachelor’s degree in business administration, focusing on finance. Outside of work, he can often be found spending time with his wife, Sara, their daughter, Anna, and their dogs, Ginger and Bailey. He loves sports and enjoys playing in his baseball league and golfing. He gives back to his community by supporting his favorite dog rescue organizations: Adopt A Golden and Golden Retriever Rescue. To learn more about Scott, connect with him on LinkedIn.

This is for educational and informational purposes only and is not research or a recommendation regarding any security or investment strategy. 

The information given herein is taken from sources that IFP Advisors, LLC, dba Independent Financial Partners (IFP), IFP Securities LLC, dba Independent Financial Partners (IFP), and its advisors believe to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as IFP does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. This report may not be reproduced, distributed, or published by any person for any purpose without IFP’s express prior written consent.

Securities offered through IFP Securities, LLC, dba Independent Financial Partners (IFP), member FINRA/SIPC. Investment advice offered through IFP Advisors, LLC, dba Independent Financial Partners (IFP), a Registered Investment Advisor. IFP and Horizon Planning Group, Inc. are not affiliated. 

Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® (with plaque design) in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.