Pay Off Mortgage or Invest: Which Should You Do First?

Oct 5, 2016 | Blog, Investing

If you’re burdened by a mortgage, you’ve most likely pondered (or even dreamed) about finally eliminating if for good. It’s a tempting scenario to consider: you completely own your home, you can avoid those pesky payments, and you have the opportunity to save money by avoiding the accruing interest.

So, if you’re wondering if you should pay off mortgage or invest, consider these points:

Opportunity cost

We (unfortunately) only have a finite amount of wealth. If you’re funneling that wealth towards paying off your mortgage, you’re most likely completely eliminating the option to see your wealth grow through investing.

It seems completely counterintuitive to avoid paying off a loan early, but when considering the opportunity costs for both, it might make sense to invest first. The S&P 500, for instance, has typically seen 10% growth year over year since its inception. On the other hand, the average mortgage rate tends to be much lower. Essentially, your money can have the chance to outmatch what you’re paying in interest rates and see growth through investing.

The value of compounding

Even if you know your wealth can grow through investing, it can be tempting to just rid yourself of your mortgage for good first, and then invest. If you encounter this temptation, realize that time is on your side when you invest early. By harnessing compound interest, you can allow your wealth to grow over the long-term to turn your financial dreams into realities.

The bottom line:

Although every situation is unique, the returns through investing will generally outmatch the interest rates on your mortgage. Granted, you shouldn’t miss a mortgage payment, but you may be better off investing that excess wealth.

At LexION Capital, we’re fiduciary advisors who help clients with any question regarding their financial life. If you’d like to learn more, don’t hesitate to contact us today.

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