It seems like such a simple question, but whether to pay off your mortgage or to build up an investment account may not be a simple answer.
First, all mortgages come with a minimum payment. Either Principal and interest, or in some cases interest only. Either way, there is a minimum amount that must be paid each month. The question of whether to invest or to pay off your mortgage only applies to any amount you have available above your minimum payment.
We are currently in a rising interest rate environment. Rates currently remain fairly low, but as they rise further, it’s important to decide at what interest rate investing any extra payments no longer makes sense. Generally, a mortgage rate of 6% or lower may make sense to invest the extra payments instead of paying down your mortgage. This is based on the 6% rate netting to an even a lower rate based on an individual's tax bracket, deductions for mortgage interest and an assumption that over a long-term period the equity market has exceeded this lower net rate. There is in fact no one size fits all answer for everyone.
Risk tolerance is a big consideration. Let's say you have a mortgage and you are making minimum payments. Over time, you build up an investment account of $50,000 that would have otherwise been used to pay down you mortgage. How would you feel in the event of a market correction? It's critical that you think of these types of results in deciding whether to invest or not. Truthfully, most people really don’t know how they would feel in the event of a market correction unless they have experienced it.
For this strategy to be successful, your portfolio will need to have a net return (after taxes on dividends and capital gains) that is higher than your mortgage interest rate after your mortgage tax deduction.
Calculating the math related to this transaction is only a part of this decision. Evaluating how you feel about having a higher mortgage and money at risk or having an ever-decreasing mortgage is just as important.
Oxford Planning Group, LLC can help you walk through this process. What's right for you? We are here to help. We are Focused on Your Tomorrows.