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You have $100 extra per month. Should you pay off your mortgage early or invest?

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Two answers:


Photo from luxerta

1. Invest (Consumer Reports)
2. Run the numbers (Get Rich Slowly)

The key thing here is to actually do an analysis, as opposed to throwing around hand-wavy arguments like “Renting is throwing your money down the toilet” and “Leverage always makes you money.” If you make a financial decision that will cost you hundreds of thousands of dollars without doing real math on a spreadsheet, then you are a moron. In fact, it should be so hard that you have to get help from other people.

Note: I also keep a list of real-estate bookmarks here.

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  1. Interesting. Simple but interesting. Most of the best advice seems to be come in and be the simplest of all ideas. A lot of times people always try to over analyze a situation and it gets them into trouble. A simple gesture as easy as writing things down will almost always give you the clear understanding.

  2. One of the things that the Consumer Reports article doesn’t take into account (but they did say you put 20% down) is if you are paying mortgage insurance payments. It _may_ be worth it to pay the extra 100$ to get rid of the insurance payments, then invest the extra 100$ plus the extra money that would have gone to the insurance payments.

    Just something to take into consideration.

  3. There is no right or wrong answer.

    That’s why it’s “PERSONAL” finance

  4. Our extras always go toward the mortgage because it will have SUCH emotional satisfaction when we no longer have to make that monthly payment. Also, we’re still so early on our mortgage that any extra on the princ is gonna save us an metric ton in interest. 🙂

  5. Historically the stock market will give a better return than many investments, plus the mortgage payment is usually a great tax write off.

  6. Um, that Consumer Reports link specifically says to invest, not pay off the mortgage.
    “Still, the bottom line, according to our Money Lab, is this: Although there are exceptions, chances are you’ll be better off putting extra money into a good mutual fund, not into prepaying your mortgage. ”

    …and they did it by running the numbers.

  7. Chris, ack — fixed text above. Thanks.

  8. What if you are not in your 20’s, what if you are in your 50’s and looking toward retirement? A small mortgage paid off would result in no monthly payments when you retire.

  9. Charlie: You could say the same about investing more and living off the income. That’s why you run an analysis (or get someone to help you do it).

  10. It’s certainly a very complicated choice. The article on Get Rich Slowly finds a compelling situation: Where the monthly out-of-pocket expense is much lower for renters than it is for buyers. This isn’t always the case, and will depend on the situation in your local market.

    Also, I don’t think either article took into account the tax incentives you get for owning a home. This tends to favor home ownership. But to be fair, you also typically have to make a down payment on your home, so you also have to evaluate the opportunity cost of putting that down payment into the purchase of a home, or investing the money elsewhere and renting instead.

    Where you want to live matters too — if you want to be in an urban area near a subway, you can often find more rental choices that meet that criteria. If you want to be out in the suburbs, there are typically more ownership opportunities.

    To get back to the specific situation where you already own and are considering whether to make extra down payments — I would suggest that if you have negative equity, I would seriously consider making the extra principal payments in the hopes of getting yourself out of that situation. That way you improve your chances of being able to sell your home without it being a short sale (i.e. where the seller has to bring money to closing because he owes more than he is selling the home for).

    Lots and lots of factors to consider — you’re right, there’s no right answer and it’s not a simple decision.