Retiring your home loan sounds like a great idea. So does investing for your future. If you don’t have enough money to do both – and a lot of people don’t – which do you go for? AdviceIQ Network member Jason Lina, lead advisor at Resource Planning Group in Atlanta, tells us how to figure that out:
Should you invest with your spare cash or pay off your mortgage early? As with most financial planning decisions, the answer is not black and white.
One of the most common questions facing families is whether to accelerate mortgage payments or to borrow as much as possible, make minimum debt payments and save for retirement.
In a world without emotional or behavioral biases where we all rationally evaluate the economics and make choices based on probability-weighted outcomes, the math points to investing over debt elimination.
Yet the mortgage decision is rarely ever this simple. It depends on your specific situation – your tax rate, portfolio allocation, credit history, propensity to save and risk tolerance.
From a purely quantitative standpoint, the economic benefit to maintaining a mortgage and investing the difference is significant for most homeowners over the past several decades.
To help understand the economics of the mortgage decision, we test two scenarios: 1) a family uses $200,000 of savings for a home, and invests each month an amount that would otherwise be the mortgage payment (less the tax deduction), and 2) a family invests $200,000 in stocks and bonds while borrowing the same amount on a 30-year mortgage.
Over the course of 42 years, the family that borrows sees a positive outcome in 97% of the time, which is important for major matters like your retirement. The only period when paying cash would be better was between May and December 1981, when the mortgage rates ranged between 16.4% and 18.5%. If we allowed for refinancing, the mortgage-and-invest approach would be favorable at all time.