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Old 04-29-2011, 03:08 AM   #1
Freerrold
 
Join Date: Jan 2011
Location: Ecuador
Default Extra money: pay off mortgage or invest

If you have extra money, is it better to make early payments on long-term mortgage or to invest it elsewhere?
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Old 04-29-2011, 03:08 AM   #2
AtropeGoorb
 
Join Date: Jan 2011
Location: Saudi Arabia
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That's a pretty vague question. If you can give us an outline of your financial situation, that would help. Questions you need to answer:

How much are you earning, and how secure is your job? Is this likely to change?
How much do you have left over each month after essentials (food, bills, insurance etc.)
How much is your house worth, and where is it?
How big is your mortgage?
How much are the repayments per month? What is the interest rate on it, and is this fixed or floating? If fixed, how long is it fixed for?
Do you currently have any investments?
How much do you have in savings?
Do you have any other debts?
What are your financial goals?
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Old 04-29-2011, 03:08 AM   #3
WrablelortWox
 
Join Date: Jan 2011
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Honestly, most of those issues overcomplicate the question. It really just comes down to risk, return, and liquidity.

Generally speaking, you know the rate on your mortgage, and once you discount the tax benefits, you know the exact return from making extra mortgage payments. Let's call that x.

Investments are a bit more complicated. You can't know exactly how much your investments will earn, but you can probably predict what you would expect, at least in the long run. Take that figure, count out any taxes you may have to pay, discount for the risk you took to get the higher return, and you have y.

Without considering any other factors, if x > y, pay the mortgage. Otherwise, invest. If it's close, you may have to ask yourself some other questions. For example, is there a chance you'll need extra cash? You can get cash out of your investments just as you can get cash out of your house, but consider the costs of both, and weigh that into your analysis. There's more of course, but those depend on your personal situation. Mostly, it just comes down to which has the higher return.
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Old 04-29-2011, 03:09 AM   #4
deborahferret
 
Join Date: Jan 2011
Location: United States
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I also believe that some debt is seen as 'good debt.' A mortgage is 'good debt' while credit card debt is 'bad debt.'

I think most people would suggest that you pay off credit card debt because the 14%+ APR on credit card debts will outweigh any money you get from investing at 10% APR.

If your mortgage has a good rate (5/6%) and you can get more money from investing at 10%, it makes sense to invest.

Note: These are just things I've gathered from reading different forums, so I might be completely wrong. This is just my understanding thus far.

So the questions that need to be asked are:
What am I losing from the interest on my mortgage?
What kinda of return would I get from investing?
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Old 11-21-2013, 07:14 PM   #5
Jasper Gallagher
 
Join Date: Dec 2010
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The only way is to prepare two scenarios: pay off mortgage; or rent accommodaton and borrow the same money for a house but put into mutual funds, taking into account in both scenarios the tax position and interest rate.
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Old 09-08-2014, 09:19 AM   #6
Albertalbern
 
Join Date: Sep 2014
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Quote:
Originally Posted by Jasper Gallagher View Post
The only way is to prepare two scenarios: pay off mortgage; or rent accommodaton and borrow the same money for a house but put into mutual funds, taking into account in both scenarios the tax position and interest rate.

I think pay off mortgage is right way.
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