Pay down your mortgage? Or invest?
Let’s say you suddenly have an extra $25,000. What do you do with it?
Do you put it toward your mortgage, invest it, or both?
There isn’t one right answer, but here is some food for thought.
Option 1: Pay Down Your Mortgage
Let’s say you have a $500,000 mortgage at 4.5%, with 20 years remaining.
If you put $25,000 toward your mortgage, you immediately owe $25,000 less.
In this example, keeping your regular payments and assuming your rate stayed at 4.5%, that $25,000 lump-sum payment could save you approximately $34,000 in interest and help you pay off your mortgage about 19 months sooner.
You’re reducing the amount of interest you’ll have to pay, without worrying about what the stock market does.
Option 2: Invest the $25,000
Instead, you could invest the $25,000 and leave it invested for 20 years.
If it averaged 7% per year, your $25,000 could grow to approximately $96,700.
That sounds great, but there’s an important catch. Though 7% is the average annual return, it is not guaranteed. Investments go up and down. Some years can be excellent, while others can produce negative returns.
You Don’t Have to Pick One
This doesn’t have to be an all-or-nothing decision.
You make a smaller mortgage lump-sum payment while continuing to invest regularly. That might look like putting $10,000 toward your mortgage and investing the other $15,000.
The right choice depends on your mortgage rate, investment timeline, risk tolerance, and overall financial situation.
The important thing is to understand your options before deciding where your money should go.
If you have extra cash and aren’t sure which route makes the most sense, I’m happy to help you run through the mortgage side of the equation and connect you with someone who can help with the investment side.
*Note: mortgage rates change throughout the duration of the life of your mortgage and stock market returns vary, year over year. All figures in this article are used as an example and are subject to change. Actual numbers may vary.
