One niggling question
that perhaps gnaws at everyone’s peace of mind
at some point of time or other is: Should you pay off
your home loan or invest the money? You’ll be
amazed by the variety of answers this question can elicit,
and from this alone you can realize that there’s
no one answer for everyone. Though theoretically, the
concept is simple: If you think of extra mortgage payments
as an investment and your return as the interest on
the loan, you need to now consider if you can get higher
returns elsewhere? “Yes?” Then, keep the
mortgage and invest the money securely.
Having said that, it’s a matter that requires
great thought whether you should pay off your mortgage
payments or carry them for longer. It depends on several
factors such as your tax bracket, how your cash-flow
picture looks and what you think about carrying a big
loan on your head. Your decision really depends on your
mental make-up and your situation in life.
For instance, if you are at the peak of your career,
you should hold on to your mortgage. No, don’t
consider paying off an early mortgage just yet. If you
are in the high income bracket, it means higher income
tax too. The good news is that your mortgage interest
is just one more income tax deduction you can claim
to pay a lower tax. This is the happy side to your loan
and you never realized it, did you?
Now, you can even get the most out of your mortgage-interest
deduction if you pay off the greater part of your interest
early on in your loan term. You can do this by paying
one or two more installments during the year. Now to
balance your budget, take care to save for a rainy day,
for your children’s education, etc.
If mortgage rates are low, invest your money in schemes
that give you better returns. But when mortgage rates
are higher, invest it in to your home since this guarantees
you a higher rate of interest. If for example, you have
a 14% mortgage, you can get a 14% rate of interest if
you pay it off. Then, before you know it, you will be
loan-free.
If you are reaching retirement age, you perhaps want
to expedite the repayment of your loans so that you
are debt-free when you hang up your boots. Ensure that
paying off your mortgage payments in a rush doesn’t
actually become counter-productive.
So suppose you decide to refinance your mortgage so
that your term is shortened to 15 years and you have
a zero balance on your home loan by the time you’re
65 years old. Due to this, your principal and interest
payment stand at $950 a month instead of $750 a month.
When you reach pay-off day, you can now invest that
$950 in a fund that gives you 9% interest. Give yourself
another 15 years and you’ll have a tidy sum of
$360,000.
Now let us suppose you’ve been retired for a
few years now. Considering this, you’re sure to
have been paying off more principal than mortgage interest.
If this is so, paying off the mortgage loan becomes
your prime interest in life, besides also proving to
be a cash flow problem. If you know that post-retirement
your cash flow will be largely restricted, it would
be wiser for you to concentrate on paying off your mortgage.
But if you have a few assets or none, it might be a
better idea for you to diversify your investments. You
could consider saving in either a savings or money market
account which would give you healthier returns than
the interest you are paying out on your mortgage.
If you’ve just sold a big house and are cash-rich,
taking out a mortgage makes complete sense, just so
long as your investment returns are larger than your
mortgage interest. If you don’t tie up all your
cash in real estate, you can take full advantage of
tax deduction, invest in other schemes and have greater
liquidity at your command. Not only will your loan be
paid off, but you will have peace of mind in your sunset
years.
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