What's the best use for your extra cash?
Maybe you have a little more cash thanks to a bonus or raise. Maybe you recently inherited
a large sum of
What's the best way to get those dollars up and running?
You should pay extra on your mortgage to shorten yours
Loan period and interest savings? Or should you invest in the stock market and build up your retirement accounts?
Or you should
Both: refinance to save your loan and invest the rest for higher returns?
The correct answer depends on your risk tolerance
and your long-term goals.
Review Your Mortgage Options (Jan 14, 2021)
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You have extra cash flow. Should You Pay Extra or Invest for Your Mortgage?
Let's look at an example to demonstrate the difference between paying back a mortgage early and using it
invest the same money.
Let's say you recently received a raise. You now have an extra
$ 2,000 is added every month.
What if you use that extra money on early mortgage payments?
Pay off your mortgage early
"Say you bought a home for $ 250,000," says Katsiaryna Bardos, an associate professor of finance at Fairfield University.
Borrow $ 200,000 with a 30 year mortgage loan
The fixed interest rate is 3.25%.
The mortgage loan payment is $ 870 per month (excluding)
Taxes and insurance)
- You would
Pay interest of $ 113,350 over a 30 year period
“But if you pay an additional $ 2,000
Month, "explains Bardos," you would pay off your mortgage in 6½ years
and will only pay $ 21,900 in interest during that time. "
- Your total interest savings would be
Be $ 91,400
That's a huge amount of money back in your pocket.
However, this example assumes you stay in
the house for your entire loan term and you pay off the loan
turned off completely – which most homeowners don't.
So let's see how the returns compare if you invested $ 2,000 each month instead of paying your mortgage on top.
Invest in the stock market
History shows that other investments a
Better annual return than the interest rate you are likely to pay
on your mortgage.
“The historical return on the stock exchange is
around 8%, ”says Bardos. She gives that
- Instead of paying extra on them
Mortgage, you choose
Invest that $ 2,000 every month for 6½ years
You earn an 8% annual return
- If so,
You would deserve $ 203,700 – why is $ 112,300 more than the $ 91,400 you would have
Save by prepaying your mortgage
For years, mortgage interest rates have been well below the average returns of
The stock market.
That means you would likely earn
a better return through
Invest than you would save by paying back mortgage interest early.
"From a purely financial perspective, it can generally make more sense to bring extra cash into your investments than to repay your mortgage early," said Anna Barker, personal finance expert and founder of LogicalDollar.
The better rate of your investment
return is not guaranteed; You could lose money investing in stocks or bonds.
"When you have a fixed rate mortgage, investing in your home is a safe bet – you know exactly how much money you will save on interest," said Elizabeth Whitman, attorney and executive director of Whitman Legal Solutions, LLC.
So when you decide how to use your hard earned money,
You also need to consider your personal risk tolerance.
If you're not sure whether to make the decision for yourself, consult a financial advisor or certified financial planner to find out what makes the most sense for you.
You have a flat rate of cash. Should You Pay Back Or Invest Your Mortgage?
Here's another scenario: an elderly relative walks by
away and you inherit $ 100,000 after tax.
They argue whether it is wiser to direct the whole thing
Lump sum for your mortgage or on shares or retirement accounts.
Take the previous example, for example
You pay off your mortgage by $ 100,000 in your first month of borrowing
A total of $ 200,000.
- in the
In this example, you are paying a total of $ 20,300 in interest on a Total savings of $ 93,000
“Your mortgage would be repaid in 11½ years
instead of 30, ”explains Bardos.
You invest the $ 100,000 in stocks that yield 8% over 11.5
- Using these metrics, you would
earn $ 243,900
Whitman warns against putting all the money in
Your home may not be a good idea – especially if home is your only investment.
“You should have several types of facilities, such as: B. stocks, bonds and real estate to diversify your portfolio, ”says Whitman.
"That way there is one when the stock market falls
You are unlikely to lose that much money if you are in the real estate and bond markets, for example
Provided your return is favorable,
Invest some or all of that $ 100,000 in yours
Retirement planning can
Be your best choice.
“With an IRA, 401 (k), or similar investment, you can put the money in dollars before taxes. Plus, you don't pay any tax on the money until you withdraw it, ”suggests Whitman.
How to pay off
Your mortgage early
If you want to repay all or part of your mortgage early, there are several options.
Use extra dollars on your mortgage in the
The accelerated payment form can be a great way to save money.
This tactic can reduce the amount of interest accrued by thousands of dollars over the life of your loan. It can also cut your repayment term by several years.
For expedited payments, send extra money to your lender or credit service provider once
or more every year
- You should
Indicate that these additional dollars need to be applied
towards your client (not future interest)
Strategy will decrease the interest on your mortgage in the
Future, shortens the term of your loan and allows you to repay your loan
“By either paying more than the minimum repayment
You can reduce the loan amount every month or with more frequent payments
Headmaster faster, ”says Barker.
“This in turn means that you will receive the full amount
The debt will continue to be reduced faster than originally expected, since less
The now reduced capital earns interest. "
You can make expedited payments by either:
little more than your monthly payment each month
bi-weekly payments (26 smaller payments per year instead of 12) or
one additional payment per year (13 total payments instead of 12)
However, prepaying your mortgage using either of these options may not be the best financial decision. Many homeowners are likely to get a higher return on their money when they invest it.
Review Your Mortgage Options (Jan 14, 2021)
Think carefully before investing or adding to your mortgage
The right choice for you will depend on your financial situation and the risk you want to take.
“Paying back your mortgage is essentially risk-free
Investment. You know how much you will save up front, ”says Bardos.
“Most of the other investments with higher returns are
associated with higher risks. You can and can lose money. So consider yours
Overall portfolio, risk appetite and time horizon for the investment
ask a few questions yourself
Pursuing one of the two options:
- Does your mortgage allow easy repayment? Or is there a penalty for prepaying your loan? "This can affect you both ways if there are costs that may not make early repayment worthwhile," says Barker. Note that the vast majority of mortgages taken out since 2014 have no prepayment penalties
- What are your financial goals? “Investing money can make more sense from a financial point of view. If you are uncomfortable with the size of your debt, putting some of it on your mortgage can help you sleep better at night, ”Barker points out
- Do you enjoy investing so much at once? “Depending on market developments, your risk appetite, and your overall investment strategy, investing extra money at once may not work. If so, you may prefer to use some of the money on your investments and the rest on your mortgage, ”advises Barker
Other smart uses for your extra cash
There is a
Chance of not paying back your mortgage or investing in the stock market
is your best option.
There may be other smart uses for your dollars depending on your financial situation. Consider:
Do I have an emergency fund?
Many scenarios where emergency saving comes in handy. What if you lost
Did you work or fell ill and couldn't work? What if you're about to have a major car repair, right?
had to move unexpectedly?
need a little more money. This is why so many financial advisors recommend keeping them
an emergency fund in your savings account. The size of your cash reserve has increased
You, but most experts suggest keeping enough money to pay up to 6
if necessary, cost of living for months.
All of your extra money on your mortgage wouldn't leave you with much flexibility
cover unexpected needs. You need a home loan to liquidate your real estate
Real estate assets.
Easier to liquidate equity investments, but you could withdraw early
Penalties and Income Tax Implications for Pulling Retirement Money
People use credit cards to address the emergency and then pay high
Interest rates on these revolving balances.
There are others higher
Should I pay off any interest debt first?
Investing or paying back a mortgage can be short-sighted when you are saddled
with a lot of high interest debt.
For example, you owe $ 20,000 in credit card debt at 20% interest you pay
Financing costs of $ 4,000 per year. For most homeowners, this pays off
Higher interest debt could initially free up more savings than you would make by investing.
If so, you may want to consider a withdrawal refinance or a home loan to use the value in your home to pay off high-yield credit card debt.
Types of loans are one of the advantages of home ownership – provided you've built up
enough equity to borrow.
Loans tend to require lower amounts of interest; The average American pays less
than 6% on student loan balances. So use a home loan for consolidation
Student loans make less sense.
Will prepaying my mortgage affect my income tax?
Becoming debt free is a goal for many people for good reason. Without mortgage debt, you have better control over how you spend your hard-earned money. Plus, knowing you have a large asset gives you extra peace of mind.
However, mortgage debt can also have its own advantages. For example, some homeowners write off their mortgage interest on their income tax returns every year. Some borrowers can even write off the cost of mortgage insurance premiums.
Interest is only tax deductible if you state your tax deductions. And you usually
Deductions should not be listed unless they exceed the standard IRS deduction.
On the mortgage debt this tax deduction would be waived for those who claim it
– and if you lose a deduction you could end up in a higher tax bracket. Pay a
A higher tax rate would affect your bigger financial picture.
Talk to a professional tax advisor if you are unsure how to best manage your income taxes. After all, we are not tax professionals and this website does not provide tax advice.
Alternative option: refinance your mortgage and invest
Maybe you don't have to choose between saving
Mortgage and investment in the stock market.
There is a third option that you should consider: refinancing to save money on your home loan and that
Rest of your money in higher-yielding investments.
You may be able to achieve both of your goals – repaying your mortgage early and realizing returns – when you refinance into a shorter loan term.
However, shorter mortgage terms mean larger monthly payments.
If you do that, you may not have a lot of money left.
You can also refinance yourself on a new 30 year mortgage
at a lower rate.
With today's near-record-low mortgage rates, you have
could still save a significant amount on your overall mortgage interest as well
Have money left to invest.
When refinancing, make sure your credit rating qualifies you for a low interest rate
and browse through at least three different lenders to find the best deal.
Know what your financial goals are, explore yours
Make sure you choose the best strategy to get there.
Check your new plan (January 14, 2021)