It feels good to be in a financial position where you’re trying to decide whether to pay off your mortgage or invest in other assets, such as real estate. Either option can advance your financial stability and impact your future, but paying off your home loan may be more suitable in some cases; likewise, investment might be better for others. It’s important to weigh a few factors to determine which arrangement is best for your situation.
Tax Benefits: Your mortgage payments are tax deductible, so you’ll lose this benefit if you pay off your mortgage early. If you have a higher income and are able to itemize several other deductions, the impact of removing the tax benefit can be significant. Other homeowners falling into a lower tax bracket might consider investing their savings into real estate or other assets rather than a mortgage payoff, as the tax savings are likely negligible or even zero.
Credit History: Your credit rating will come into play if you’re looking to invest in real estate rather than pay down your mortgage. If you must obtain a mortgage to pay for income property, you need a strong credit history – just as you did when purchasing your primary residence. You’ll be limited if you have a weak credit score. The interest rate on the mortgage will be higher and you may be required to put down a larger sum for a down payment. In such a situation, mortgage pay off is likely a better decision.
Social Security & Retirement: Many mortgage holders considering paying off the loan are looking to do so because they’re reaching retirement age. If you’re in a position where you’ll be relying on Social Security, an IRA, 401(k) or other retirement plan – or a mix of these – it’s critical that you look at your pre-tax income. Knowing what money is coming in and going out of your household every month is a major factor in deciding whether to invest or pay off a home loan. You might find peace of mind in knowing that you no longer have a monthly mortgage payment, especially once you’re not working. Other retirees might have enough Social Security and retirement income that they’re comfortable living with a mortgage. Investing may make more sense because it provides additional income.
Forced Savings: In a sense, a mortgage is a form of savings that you’re forced to make in order to comply with the terms of your loan. If you default, you risk significant penalties, including losing your house through foreclosure. Homeowners who aren’t disciplined in saving money and tend to spend should stick with monthly mortgage payments. Attempting to invest instead may lead to irresponsible spending.
Risk Tolerance: If you’re considering investing in stocks or bonds, you need to understand the risk involved with these securities. While the rate of return may be higher on these investments, you subject your investment to possible loss due to economic downturn or other market factors. Paying off your mortgage contains no risk, other than a fluctuating interest rate if you have an adjustable mortgage rate.
The choice of paying off your mortgage or investing in real estate can be overwhelming, but these factors should help guide your decision. In addition, you should consider consulting with a mortgage equity professional with expert knowledge about these options.