Wouldn't it be nice if someone walked up to you and gave you the amount of money you need to pay off your mortgage? Of course, if there were no strings attached, it would be a great thing to happen to you. Then, your next likely question would be: “should I actually pay off my mortgage with this money or should I invest it?”
To a lesser extent, a lot of people are faced with this same decision monthly when they have some extra dollars available. Is it better to take this money and put it toward paying off the principal of the mortgage, or would it be more profitable to invest it in the stock market, mutual funds or some other opportunity.
The Two Schools Of Thought
There are those who feel, since they are budgeting successfully each month and because, at some point their mortgage will be paid off anyway, they should invest any extra funds at the end of the month. There are others who feel their number one concern is to get the mortgage payment off their back and then they will have a lot of money to invest each month.
People who fall into the first category will say “sure you'll have a lot of money to invest then, but had you been investing all along, you would be way ahead of the game.”
It's a Matter of Rate of Return or Mortgage Rate
If life were simple, you would know in advance how much money you're going to get from your invested money. Unfortunately, life isn't that simple. Oh sure! You know when you put money into savings accounts or Cd's how much money you will get back, but you also know the percentage you are being paid in these investments is small in comparison to your mortgage interest rate.
Many times throughout the last 30 years, there have been mutual funds that have returned in excess of 25% some years. This, of course, is a tremendous return. If we knew in advance we would get this kind of return, we wouldn't hesitate to invest all our extra money in mutual funds. The problem is, even though you might think a particular mutual fund will give you a tremendous return, you can't be absolutely certain.
The rule of thumb is, the safer the investment, the lower their return. There is no escaping it, in order to get a high rate of return; you must take a substantial risk.
Credit Cards Are the Real Culprit
Anyone who is saddled with a lot of credit card debt need look no further to find a high rate of return. Many credit cards charge 20 percent per year. Some actually charge 30 percent. While a mutual fund has to have a great year to return 20 percent, you know what you'll save once you pay off your credit cards.
So, if you're debating paying off your mortgage or investing your money and you still have credit card debt, adjust your thinking. Any financial advisor will tell you to pay off your high interest debt first. After you do so, you can decide what to do with the rest of your money.
Your Safest Bet
I believe in capitalism. I also believe that there's more opportunity today than there has ever been in history. Still, all economies, no matter what country you are in or what era it is, have their ups and downs. For a normal family, it doesn't take too much of a down to cause big financial problems.
Therefore, I always advise taking the safest bet. Even if your mortgage rate is only 6% per year, it is still compounding at a higher rate than a safe investment, like a savings account, for instance. So, if you can find a way, pay off your mortgage and then have yourself one heck of a mortgage burning party!