Mortgage Vs. Savings (1/30/2015)
One of the most popular topics clients often wish to discuss is whether to pay extra on a home mortgage or to invest those extra funds in another kind of asset. For some, the idea of having debt of any kind is stressful, and they feel compelled to pay down the debt at all costs. For others, the idea of having some liquidity built up while continuing to make regular mortgage payments contributes to their peace of mind. While there is not a right or wrong answer, you can do both: build assets while systematically reducing debt.
Consider a $100,000 mortgage at 4% over 15 years. The monthly payment for principal and interest would be approximately $740. You could pay an extra $272.45 and have the mortgage paid off in 10 years--or you could invest the $272.45 over the 15-year period while still paying your $740. After 15 years at a 4% rate of return you will have more than $67,000 and a mortgage that is paid. During that time period, you will also most likely have received a tax benefit for your mortgage interest deduction. If we assume a 5% rate of return on your home at the $100,000 initial market value, your home would be valued at close to $211,000. You have tax savings, liquid savings and the equity in your home. If you lose your job or have other unforeseen expenses, you have that extra savings to help you through.
The ultimate answer is to do what allows you to sleep at night. Leveraging debt with savings, however, can give you some flexibility for the unknown.
Posted Friday, January 30, 2015