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- Investing Money VS Paying Off Mortgage
There is no general answer to this question. You should read my article titled, 7 factors that affect how you arrange an investment portfolio. That will give a good background to what I will further share here.
Instead of giving you an argument that tells you what to do, I will share contexts that require different answers and why those answers are the right course of action.
1. Dream House; High Rate
In this scenario, I am assuming the house on the mortgage is your dream house. And let's say you got it at a high fixed interest rate, say 7%. You love the house and you want to own it for the rest of your life.
We are assuming that you live in the house too. It doesn't produce any rental income. Also, you spend money on maintaining the house. The next question then is - how well are you doing financially and in life?
If you still have lots of opportunities ahead to make the kind of money you have now, then you should pay off the mortgage and get rid of the high rate. This also allows you to take a loan with the house later when rates are significantly lower and you need cash.
2. Dream House; Low Rate
If you got an incredibly low fixed rate on your mortgage, like 2% or even less, then the answer might be different. Yes, it is your dream house. Also, you are in a position where you can still make the kind of money you are making now for at least 10 more years.
In that case, there is no reason to rush. Invest your money instead. Don't be fooled into the folly of bragging that your dream house is "paid off". This is a money game, and you should never compare your situation with that of another. Never.
This becomes a different story if you are retired and you can already see that meeting up with the monthly payments will be a challenge. And let's say you have a few years left (perhaps 5 years or less), and you don't ever want to lose the house. Then, pay it off and end the chapter right there.
Some would argue that you should invest the money and be able to meet up with the monthly payments. I would say that you should make the best decision for your peace of mind. At retirement, what gives you peace of mind should take priority.
Every investment comes with risk. New kinds of investments have even bigger risks. The risk of losing your dream house at retirement because an investment failed is not worth it. Just pay the house off.
3. First House; High Rate
The main question in this scenario is this - have you started a family? If the answer is no and you have great income or cashflow, you should concentrate on making investments.
In this case, you should refinance the moment you have the chance to get a lower rate. Also, this house could serve as an investment property later.
In the US, one of the best ways to get into profitable real estate investing is to buy a house, live in it for a few years, then move and rent it. Not sure how that works in other countries, but it is a great strategy in America.
You can do this for a first house. And maybe for a couple of houses before you get your dream house. And perhaps, your dream house might change with time. Focus on investing.
4. First house; Low Rate
No rush here either. Focus on investing. This is assuming you are young and have a vibrant income or cashflow. Your mind should always be on the kind of investment portfolio you want to build and what is necessary for that.
It is very rare for it to be a wise decision to pay off the mortgage in this scenario. You would likely turn that house into a rental property later, or trade it in to buy your next house. So you should keep your cards open.
You will likely buy your next house with a mortgage. So, you don't want to throw that leverage away. This is in the sense that if you have a low rate and rates have gone higher, you can be able to negotiate with the bank to pass your low rate from your first house to your next house.
Yes, that's possible in some cases. If you talk to a good mortgage lender, they should be able to tell you all about it.
5. The Investment
This is an angle that you might not be looking at. And it is the investing you want to do with the money. If you don't have an investing strategy, you are gambling. And a lot of people are gambling today thinking they are investing.
I always think about the story of a young woman who made a million dollars during the dot-com boom. She decided to invest the money in a mutual fund company. And by 2009 (at the financial crisis), the money was completely gone.
Years of losses, fees, and commissions had wiped out her entire investment. She didn't get to use the money. She just found out that her investment account was now zero. Of course, you can guess how she felt.
This is why I sometimes cringe when I hear people say they want to invest their money. The question is - do you know what you are doing? This is because every investment has risks involved.
No matter how "protected" your investment is, there is still risk involved. And a tiny risk can grow to be a monster risk with time. So, what is the investment?
If you don't have an understanding of what you want to invest in, you should learn first. If you don't invest in financial/investing education, you will pay with your investment capital. It is almost karmic.
A good start will be subscribing for the premium full experience here at Rich Culture. But that is just the beginning. Depending on the type of investments you prefer, you would have to go further.
So, if you know nothing about investing (and it is just a broad vague word to you), maybe you should not invest yet. This doesn't automatically mean you should pay off your mortgage with the money too though.
You have two options here - invest in learning (which isn't all passive, by the way) and enjoy the money (by spending it lavishly on anything you like. And sometimes, enjoying the money isn't a bad option.
Think about that.
Conclusion
Should you invest your money or pay off your mortgage? Well, it depends on a few things. Is it your dream house or your first house? Is the mortgage rate high or low? Are you still actively working or retired? How many years do you have in front of you? What is your cashflow or income situation? Which investment are you considering?
All of this should be taken into account when making this decision.
Stay rich.
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