Maximizing Your Money: Paying Down Your Low-Interest Mortgage vs. Investing (2024)

FAQs

Is it better to reduce mortgage or invest? ›

From a financial perspective, it's usually best to invest your money rather than funneling extra cash toward paying your mortgage off faster. Of course, life isn't just about cold, hard numbers. There are many reasons why you might choose either to pay your mortgage early or invest more.

Make sure you understand the tradeoffs of a buydown before committing. One way borrowers can get a lower interest rate is by putting more money down upfront. This strategy, called a mortgage buydown, involves buying mortgage points that lower your rate by a certain percentage for the life of the loan.

Bottom Line. Though likely not your current situation, when you have a low mortgage rate, it may not make sense to pay off your mortgage early when you could invest that money instead. Your investment returns could be double what you'd save by not paying as much mortgage interest.

Taking this into consideration, if you have debt with interest rates north of 10%, it's likely best to pay this down first. However, if you have an auto loan or mortgage with a 3% interest rate, it is probably better to invest your money, as you can reasonably expect in the long term to earn more on your investments.

Millionaires usually avoid the following: High-interest debt: Millionaires typically steer clear of high-interest consumer debt, like credit card debt, that offers no return or tax benefits. Neglect diversification: They don't put all their eggs in one basket but diversify investments to mitigate risks.

But with nearly two-thirds of retirement-age Americans having paid off their mortgages, it means that the average age they have gotten rid of that debt is likely in their early 60s. Stats from 538.com, for example, suggest the age is around 63.

A 3-2-1 buydown mortgage defined

It gets its name from the variable rate of reduction during those first three years: 3% for the first year of financing, 2% for the second, and 1% for the third (and final) year of reduced-rate payments. From the fourth year onwards, you'll pay the full interest rate.

The larger the amount, the better your interest rate will be. This can be especially helpful if you're trying to get a mortgage when mortgage rates are rising while home prices are falling. Putting less down and investing the difference is a riskier proposition in a rising-rate environment.

Example of Paying Discount Points

On a $100,000 mortgage with an interest rate of 3%, your monthly payment for principal and interest would be $421 per month. If you purchase three discount points, your interest rate might be 2.25%, which puts your monthly payment at $382 per month.

Dave Ramsey, the renowned financial guru, has long been a proponent of financial discipline and savvy money management. This can include paying off your mortgage early, but only under specific financial circ*mstances.

What happens if I pay an extra $1000 a month on my mortgage? ›

Throwing in an extra $500 or $1,000 every month won't necessarily help you pay off your mortgage more quickly. Unless you specify that the additional money you're paying is meant to be applied to your principal balance, the lender may use it to pay down interest for the next scheduled payment.

In most cases, financial advisors suggest keeping a mortgage if you have a low interest rate and a relatively low balance.

If your interest rate is 4.5% or lower⁴, you may want to focus on investing. Alternatively, if you have a high interest rate, you'll want to make paying that off a priority. Also, remember that credit cards and personal loans commonly come with high interest rates.

If the interest rate on your debt is 6% or greater, you should generally pay down debt before investing additional dollars toward retirement. This guideline assumes that you've already put away some emergency savings, you've fully captured any employer match, and you've paid off any credit card debt.

For some, it may make more sense to pay off debt before saving for a down payment, especially considering the ways in which having debt can impact your mortgage application You may want to prioritize paying off debt if you: Have a significant amount of consumer debt.

Decreasing the term means you clear the loan more quickly, so there is less time for interest to accrue, meaning the overall cost decreases.

In principle, if you're offered a higher interest rate on a savings account than the rate you pay on your mortgage, it could mean it's best for you to save. However, if you're paying a higher interest rate on your mortgage than you could earn from a savings account, it might be best to pay off your mortgage first.

While paying off a mortgage early can save on interest and reduce financial risk, using available funds to invest in more properties can potentially yield higher returns, depending on market conditions and investment choices.