So you find yourself with a little bit of extra money – perhaps due to a raise, an inheritance or an unexpected windfall?
Should you put all of your money toward paying down the mortgage on your home? Or would you be better off placing your extra cash into an investment account?
Deciding whether to pay down your mortgage or add to your investments is a complex choice and it depends on a number of factors in your personal financial situation.
Here are some of the things that you will need to consider when making the decision:
How Much Are Your Investments Earning?
A Financial Planner can help you determine a reasonable expected return on various investment types. Is your money expected to more than you would save by paying down your mortgage earlier after taking into consideration the tax deductibility of mortgage interest and tax implications on your investments?
Do You Have Other Debt Obligations?
It doesn’t make sense to be overpaying on your mortgage if you have any credit card debt or other installment debt charging a higher interest rate than your tax deductible mortgage rate. Prioritize your high-interest debt first before you think about overpaying on your mortgage.
Do You Have An Emergency Fund?
You should always have an emergency fund in cash that will protect you from having to use expensive credit card debt if an unexpected payment comes up such as a burst pipe or a flat tire on your car or if you lose your job.
A good rule is to have the equivalent of three to six months of savings in a bank account just in case you need it. This is a top priority and only after you have this emergency fund established should you consider overpaying on your mortgage.
Maxing out your retirement contributions is a priority over paying down your mortgage. Given the tax deductibility of mortgage interest and the tax benefits of retirement accounts, maximizing your 401k and IRA should take precedence over paying down your loan. It does you no good to be debt free entering retirement if you don’t have enough of a nest egg to live comfortably.
These are just a few of the important factors that you should consider when deciding whether to overpay the mortgage on your home or place the money in savings. For more information, contact Sammamish Mortgage at 425-401-8787.