“But isn’t it always good to pay off your debt ASAP?”
That’s what people ask me when I tell them about this crazy idea of investing instead of paying their mortgage.
And no, I don’t mean hiding from your lenders. You just shouldn’t be in a rush to pay it off. Because if you want to become a millionaire someday, doing what’s safe won’t get you there.
In most cases, I recommend investing instead of paying your mortgage early because:
- It allows you to access your cash more easily. Refinancing your mortgage can take months. And if you need the cash right away, you’re doomed.
- Investing can give you higher returns. Sure, you’ll pay a few thousands more on your mortgage. But make the right investments, you can more than make up for that loss and earn extra money.
- It diversifies your assets. If your home value nosedived, you wouldn’t even have enough money to move!
- You can write off mortgage interest. I’ve done the Math. And I found out I can save $6,300 a year in taxes because of my mortgage payments.
If you know what you’re doing, it’s usually crazy not to invest your money instead of paying off your mortgage early.
Let me emphasize: if you know what you’re doing.
No one’s going to crucify you for rejecting my higher-yielding albeit unconventional advice. Because in these five cases, it makes sense to just pay off your mortgage early:
#1 – You don’t know how investing works
You don’t want to lose money, do you? That’s what’s bound to happen if you invest poorly.
Just like with the real estate market, it’s very risky to invest in real estate without learning about real estate first.
“A wise man speaks because he has something to say, a fool speaks because he has to say something” – Plato – Source
The odds that you will earn money investing if you don’t know what you’re doing are slim to none.
Heck, you might as well have gambled in Vegas. At least there, you’d have fun and get free drinks.
By investing your money you’re not just risking losing money. You’re risking money that you could have used towards mortgage payments. So don’t force yourself to invest in stocks before knowing the basics (but learning to invest is very easy!).
Besides, paying your mortgage is the easiest and safest investment that you can make even if the payout isn’t large. It’s also reassuring to know that you won’t end up homeless even if you lose your job.
But if you’ve done your homework and are ready for a sign to start investing, DON’T SPEND IT ON YOUR MORTGAGE!
#2 – You’ll just sit on the money
Let’s say that for whatever reason, you aren’t very likely to do much with the cash you’ll accrue by not paying down your mortgage.
I don’t care what grand plans you have. If you’re not going to do anything with the money, you might as well make a subpar investment – in your home equity.
Even if your home value increases 1000% in a year, and it would have been smart to buy a second house, investing in something is better than nothing.
#3 – You don’t trust yourself with handling your money
Are you the type to spend a wad of cash for Black Friday sales like you’re preparing for an apocalypse? Or just don’t make the best financial decisions overall?
Then you’re better off paying your mortgage early.
It’s like most people with Pringles – you can’t just stop with one. So if you’re trying to watch what you eat, you don’t want to be in the same room as a can of Pringles.
And if you want to spend more of your money right, make it harder for you to access. Paying your mortgage makes it very difficult to access and saves you from yourself.
But if this is the only reason you’re paying your mortgage instead of investing, pull yourself together, and straighten out your finances! You’ll thank yourself later when you are bringing in thousands of dollars more per year.
#4 – You’re on a limited, fixed income
Anyone can invest, but I don’t recommend it if it means risking your credit.
Yes, the stock market is the better long-term decision. But in the short term, get ready for a roller coaster because your asset value will increase and decrease every day.
And if you need that money to live, you may drive yourself to bankruptcy. No higher-yielding opportunity is worth that risk because it will limit your future housing and lending opportunities. You need something risk-free like a mortgage payment, although I would argue an emergency fund is a better course of action.
But what do I mean by limited and fixed income? There’s no fixed number. It depends on your:
- Monthly spending. How big is the difference between your income and spending?
- Existing savings. How prepared are you for a financial emergency?
- Risk appetite. If it’s low, investing may terrify you.
This doesn’t mean that you shouldn’t ever venture into the stock market. Because once you’ve paid off your mortgage, you’ll have money to invest. It needs to go somewhere!
But maybe handling the short-term investment losses will be easier if there’s no mortgage payment in the wings.
#5 – You want stability
Life’s already unpredictable. For example, who thought COVID-19 would do this much damage to the economy?
Things can turn to crap in a second: that’s just a fact of life. And when they do, you might be shaking in your boots.
According to Forbes, there are tougher times ahead. The economy can only endure so much without a COVID treatment or vaccine before it breaks like uncooked spaghetti. Where would you be if that happens?
How does that make you feel? Opportunistic? Well then invest away. But your stomach drops, maybe just pay down some debt instead.
Otherwise, never pay your mortgage early
Investing will always be the smarter option except for the five cases I mentioned. That’s why you should read up on the stock market and find out how it works.
Overcome what’s stopping you from investing in stocks. There’s a goldmine waiting there for people smart enough to make the right investments.
Leif Kristjansen is the co-founder of FiveYearFIREescape.com where he and his wife write about finances and early retirement for busy people. In their early 30s, they even retired from their corporate 9-5 and want to teach you how you can do the same. They have kids and a house in a high cost of living city but managed to succeed via saving skills and rental houses.
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