Highlights » ParentCare » Vol. 62

Should I invest for the future or pay off the mortgage?

Tom McDavitt

This question has been asked over and over again through the years, and frankly, there is no “right” answer. There are pros and cons to both decisions, and we will try to point some of these out. Let’s start with the fact that most homeowners yearn to pay off the mortgage, as it is one of, if not the single largest item in their budget. Our parents ingrained the idea of paying the mortgage off and freeing ourselves from this enormous burden. However, competing with this goal is the need for most people to invest for retirement, a child’s college education or some other goal.

With mortgage rates as low as they are these days and the availability of so many tax-advantaged investment plans, it is not as easy a decision as it was for our parents. Would we be better off investing in a 401(k) plan, which in many cases has a matching contribution from our employer? Or how about a 529 College Savings Plan, which, if used properly, allows for tax-free gains over time? Another under-utilized savings plan is a Roth IRA. This, too, allows for tax-free withdrawals at retirement, assuming you follow the rules.

With that in mind, we recommend that you consider these points when looking at this decision:

The interest rate on your mortgage. If it is like most today, a fixed rate at or below 5 percent, then the argument would lean towards investment over payoff. The theory being you could earn a higher average rate of return over the length of your mortgage with a balanced portfolio of stocks and bonds. Although that is not a guaranteed result, history has shown this to be the case. The recent long-term “bull” market might fortify that thinking, but I would recommend you get some help from a professional if you are new to investing.

How long do you plan to stay in your home? If it isn’t for the long haul, you might be better off investing than tying the funds up in home equity when you may need it for another reason or to buy a new home later. If, on the other hand, you are in your home for life, you may be more swayed to eliminating the debt.
Do you have the discipline to invest the funds regularly? There is nothing worse than seeing people fail to save their discretionary income and end up with a large mortgage and little or no savings!

How much money do you have saved for an emergency? It doesn’t make sense to sink your extra funds into the mortgage if you don’t have savings to cover an unexpected large expense or a period of unemployment. Remember that it isn’t easy to extract that equity overnight — or perhaps even at all — if you are out of work.

How close to college expenses or retirement are you? The closer you are, the more likely you need the funds versus the extra equity. If home equity is the only resource you have, along with Social Security, at retirement, then you may be forced to consider a “Reverse Mortgage” to supplement your income. If that’s the case, how much benefit did you really get from the mortgage acceleration?
Psychology. Some people just cannot stomach debt. They might just be better off paying down their mortgage sooner. In the long run, they may be better off because they will work harder at this goal than any other.

I will conclude with another idea that might work well for everyone. How about a middle ground approach? Why not take half of the funds you have available and pay the extra on your mortgage and then take the other half and invest it? That way, you have some investments available if the need arises and you are chipping away at your mortgage at the same time.

Tom McDavitt, located at 181 Main St., Suite 200, Shrewsbury, MA, is a Registered Representative and Investment Adviser Representative and offers Securities and Advisory Services through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser, and can be reached at (508) 842-6222.

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