Advice on Paying Down Mortgage or Investing
Option 1: Pay Down the Mortgage
Benefits:
Guaranteed Return
- Paying down your mortgage is like earning a 6% return, risk-free (your interest rate).
- This is especially appealing if you have a low risk tolerance or if the stock market seems uncertain.
Lower Monthly Payments
- Your monthly mortgage payment could decrease (if your lender recalculates), freeing up cash flow.
Peace of Mind
- Reducing debt can lower financial stress and provide a sense of security.
Interest Savings
- Paying $100k upfront could save tens of thousands in interest over the life of the loan.
Option 2: Invest the $100k
Benefits:
Potentially Higher Returns
- Historically, the stock market (e.g., S&P 500) averages 7-10% annual returns over the long term, outpacing your 6% mortgage rate.
Liquidity
- Money in the market is accessible if you need it. Once you pay the mortgage, that money is tied up in your home and harder to access without refinancing or selling.
Tax Advantages
- If you invest in a tax-advantaged account (like a Roth IRA) or tax-efficient ETFs, your investment can grow tax-free or tax-deferred.
- Mortgage interest is still deductible if you itemize, softening the cost of the loan.
Factors to Consider
Do You Have Other High-Interest Debt?
- Pay off higher-interest debt (credit cards, personal loans) first.
Do You Have an Emergency Fund?
- Ensure you have 3-6 months of expenses in a liquid savings account before tying up funds in a mortgage or investments.
Risk Tolerance and Investment Horizon
- If you’re comfortable with market volatility and have a long investment horizon (10+ years), investing might make more sense.
- If you prefer certainty, reducing your mortgage might be better.
Cash Flow Needs
- Lowering your mortgage balance could improve monthly cash flow, reducing financial strain.
Blended Approach
- Consider splitting the $100k: put $50k toward the mortgage and invest $50k. This reduces debt while still giving you market exposure.
Simple Math Example
- Mortgage: $350,000 at 6%, 30-year fixed-rate.
- Monthly payment (before): ~$2,100.
- Monthly payment after $100k lump sum: ~$1,500.
- Investing: Assume an average annual return of 8%.
- $100k invested for 30 years = ~$1,000,000 (compounding).
- This far exceeds the ~$115,000 saved in interest by paying down the mortgage.
Verdict
- Pay Down Mortgage: If you value a guaranteed return, want lower monthly payments, or prioritize debt freedom.
- Invest: If you’re comfortable with risk, want long-term growth, and can handle market fluctuations.
Splitting the amount (e.g., $50k mortgage, $50k investments) might balance the benefits of both options.