What To Do With Extra Cash: Pay Off or Invest? (Part 2)

Other Points to Consider

The following list of questions may help you decide which option is best for you:

• Does your mortgage have a prepayment penalty? Most mortgages don’t, but check before making any extra payments.
• How long do you plan to stay in your home? The main benefit of prepaying your mortgage is the amount of interest you save over the long term; if you plan to move soon, there’s less value in putting more money toward your mortgage.
• Are you saddled with high balances on credit cards or personal loans? If so, it’s often better to pay off these debts first. The interest rate on consumer debt isn’t tax-deductible, and is often far higher than either your mortgage interest rate or the rate of return you’ll likely to receive on your investments.
• Are you currently paying mortgage insurance? If you are, putting extra toward your mortgage until you’ve gained at least 20% equity in your home may make sense.
• Have you saved enough for retirement? If you haven’t, consider contributing the maximum allowable each year to tax-advantaged retirement accounts before prepaying your mortgage. This is especially important if you are receiving a generous employer match. If you save 6% of your income, an employer match of 50% of what you contribute (i.e. 3% of your income) could potentially add thousands of extra dollars to your retirement account each year. Prepaying your mortgage may not be the savviest financial move if it means forgoing that match or shortchanging your retirement fund.

The Middle Ground

If you need to invest for an important goal, but also want the satisfaction of paying down your mortgage, there’s no reason you can’t do both. Work with your financial advisor to allocate part of your available cash toward one goal, and put the rest toward the other. And remember, no matter what you decide now, you can always reprioritize your goals at a later time to reflect changes in your life circumstances, market conditions, and interest rates.

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