Perhaps it’s something in the air, but there are seasons when I get numerous people asking the same question of me.
There was a period in 2023 where questions around parents offering financial assistance to their adult children kept arising. I was less surprised by the season of client questions surrounding what to do with their investments during a tumultuous market.
Lately the trending question in my circle is whether to pay off a mortgage quickly or invest instead.
Here’s how the question frequently is posed to me: My mortgage rate is 3 percent. Wouldn’t it be better for me to invest my extra money and earn more than 3 percent instead of paying down the mortgage?
On the surface, it often feels like the answer is yes. After all, as of this writing, 6-month CD rates are around 5 percent. If you’re paying 3 percent interest on your mortgage and you’re earning 5 percent on your CD, that’s a net gain of 2 percent, right?
However, those who ask the question often aren’t looking at CD rates. They’re often looking at returns on mutual funds of 10-12 percent annually on average since the fund was created. That’s not to say the fund has returned that every year. Some years, it might be up 12 percent; others it might be down 30 percent.
Consider today’s mortgage rates, which are 7-8 percent in some instances. Investing extra money and earning more than 8 percent obviously is a higher bar.
Consider the Sure-Thing
Here’s how I look at it: Investing your extra money instead of paying more on your mortgage might grow it at a higher rate than you’re paying in mortgage interest, but it might not. Paying extra money on your fixed rate mortgage is guaranteed to reduce your principal every time. Who doesn’t like a sure-thing?
Ask yourself if you’re prepared to keep paying that 7-8% mortgage interest and potentially watch your investment account lose money for a period of time.
Ask yourself if you’re disciplined enough to invest your money instead of paying down your mortgage principal, and then take the potential earnings to put toward your mortgage. Maybe the answer is yes. But be honest with yourself.
Baby Steps
If you know me, you know I’m a huge fan of Dave Ramsey’s debt elimination advice. My husband and I worked through each of Ramsey’s 7 Baby Steps and marched ourselves right into debt freedom.
Once you’re out of consumer debt and have accumulated three to six months of emergency savings, this is a good time to look at saving for retirement. As a financial advisor, I enjoy creating financial plans for clients that offer guidance on how much to save for retirement. We also address other financial goals, such as saving for your children’s college education or paying off your home early.
February 2024
