Tune in as Sam Kwak talks about how you can invest AND pay off your mortgage at the same time.
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Pay Off Your Loan Or Invest? (Know What's Better For You)
Advantages
Paying off your mortgage early is generally a good thing. Having debt is something none of us want to have on our “to-do” list. But if you’re trying to increase your financial peace of mind, maybe it’s not the right first step, but maybe it is. How would you know?
It’s advised to pay at least slightly more per month on your mortgage, especially for individuals who have just received a raise in their income. This method will help you finish early. But, what are other benefits of paying off your mortgage early?
- Savings on your interest. You get to make potential interest savings on a reduced principal amount that could have accrued earlier
- You become debt-free! Paying off your mortgage early means no more interest payments, no more debt! It is very liberating to have a home that you can call 100% your own. You can invest the interest amount that you are making in the monthly payments on other projects
- You mature into financial independence. By becoming debt-free, you can prioritize your investments and channel your funds to other various projects
- You become creditworthy. By becoming debt-free your credit score definitely goes up, how great is that?!
There are other methods, too. If you want to know how you can pay off your mortgage faster, The Kwak Brothers have developed a method, and many of their clients have benefited greatly from it. It’s called Accelerated Banking, and you can read more about how to pay off your mortgage faster here.
Disadvantages
With that settled, paying off your mortgage is not always a walk in the park. Here are some of the disadvantages associated with early mortgage repayment.
- Reduces your savings. Speeding up clearing your loan may force you to cut back on the amount of savings you have. It means that you may lack some cash to cater to your financial emergencies at the end of it all
- You may be missing out on important tax deductions. Yep, that’s right! You may be forced to miss out on important tax deductions on your mortgage interest payments by making early payments. Such write-offs increase your capability of a refund and lower your taxable income for those paying a mortgage
- You cut back on other types of investment choices. You may risk cutting back on meaningful investment decisions that would ultimately reap better returns in the future. These include the stock market and other riskier investment choices but have better returns for you.
- You may be forced into making prepayment penalties. Depending on the type of lender, you may realize that you are making payments on your penalties for early payment. While this is usually dependent on your mortgage lender, it may compromise your pay since such payment may reduce the payment pegged on the outstanding balance so definetly ask your lender if this applies to you
Investing Before Paying Off Your Mortgage
Investing extra cash in savings can lead to a better and more stable financial future. Savings can be in bonds or other forms of retirement funds.
Monetary savings are an investment for your future or in case of any emergencies. We live in unprecedented times, what happened 2 years back because of covid was a wake-up call.
Businesses were affected, people lost jobs, and others struggled to pay off their mortgage payments. While the move to pay off your mortgage interest amount will eliminate any debt, investing also means that you save money to cater to a similar project and survive through such times.
As interest grows over time, you will have grown a considerable amount to cater to the mortgage in the future if you decide to invest earlier. Check out a few advantages of why you should consider investing your money before paying off your mortgage:
- Receiving a higher rate of return for your investment. You get to receive more interest and higher earnings for your investment when you invest in a riskier project instead of having to pay off your mortgage early
- Greater asset liquidity. You get to have more asset liquidity, meaning that you can easily convert your investment into cash, considering its simplicity as opposed to looking for a cash refinancing option or having to sell your home
- You are building a more secure financial future. It increases your chances of securing a better, more solid, and more secure future for yourself and your family for if/when you decide to invest in stocks and bonds
- It may increase your employer matches. It might result in getting a better match once your employer decides to match your contributions for retirement. Surprisingly, your employer may decide to go full-length, matching your said contributions dollar for dollar or meeting you halfway in your contributions. This means that you get to have more wealth for your future if you choose a retirement account
- There are different ways to invest. Not just in stocks and bonds, but real estate as well. But, maybe you don’t know how or aren’t sure this could work for you. Maybe you’re not passionate about real estate investing, or could care less about real estate. Investing simply means putting something in to get more out of it. So what can you invest in?
FAQ's
Still asking yourself questions? Still need answers? Here are commonly asked questions that you also may have when choosing to invest or pay off your debt.
Is Renting Out Property a Great Way to Generate Aditional Income For Your Investment?
Renting out property is a great way to generate passive income. But it does take some work to get it set up. The great thing about real estate investing is that it creates plenty of opportunities to leverage your investment. Since the amount of interest that is repayable on the property is usually tax-deductible, you get to reduce the amount of tax-deductible income that accrues on your property. It also means that you can earn by renting out your property to your tenants, ultimately giving you additional income without much effort (of course after you’ve set it up)
Is Mortgage Tax Deductible?
Those who decide to make their mortgage payments should be able to make deductions on their loans for up to $750,000. This means that the government is lowering the number of tax payments that are being remitted on your mortgages, and as such, you should be able to look into clearing all your payments at once since you will completely miss out on the given tax payments
Should I Repay Debt or Invest First? Or Both?
It is all about making the most out of your financial situation. For example, if you are not planning on remaining in your current home for a long time, you should not look at clearing your mortgage repayment at once. Again, if you believe that your current financial investment will be risky and not quite forthcoming, you should not put all your money there as it reaps out all your benefits. It is important to make sure you wait until you are financially independent to make sure that you can make all your mortgage payments and invest at the same time
What is a Tax-Free Retirement Account
This is a long-term tax investment plan designed to reduce the amount of tax-deductibles on your retirement income. Such type of taxes does not rank as a qualified plan and, as such, does not apply similar rules as a 401(k) plan, but it gives tax benefits and protects its investors from risk
Is It Legal To Get Tax-Free Retirement Income?
Yes, it is. Tax-free retirement income is legal, and there are several ways that you can use it to generate this kind of income. From a Roth IRA account to life savings, there exists a different variety of ways that you can be employed to get a relatively comfortable saving for your tax on retirement benefits. While they may need a combination of different strategies, they are all worth your while
Conclusion
We’ve discussed the advantages and disadvantages of paying off your mortgage early, and Making mortgage payments boils down to how much you are comfortable paying out monthly during that mortgage period. Most importantly, a debt pay-off planner allows you to check how much savings you can spare on your monthly repayments. You can use this calculator to see if this method to paying off your mortgage faster can work for you.
Investing takes a certain skill, but if you don’t know how or where to start, don’t worry, you can learn! Take advantage of our free content and resources.
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Lydia Wanjiku
Lydia is one of our content writers. She has experience in sales, social media, and in marketing communications. Her interests range from photography to writing, and entrepreneurship to the great outdoors.
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