Towards the end of each year and around the holidays, we frequently are having conversations with clients about what to do with cash. A lot of individuals get Christmas bonuses or their annual bonuses are always paid out towards the end of the year. These bonuses can absolutely help cover the cost of Christmas spending that always seems so unexpected, but what if you’re in the position to save that extra cash? The two most popular routes we talk to clients through are investing the money or paying down the mortgage. Even though life isn’t always about maximizing every single penny to its maximum potential (see: Currency of Time), is it technically better to invest extra money or pay down a mortgage?
First, let’s look at paying down your mortgage with that extra cash. For simplicity’s sake, let’s say you just started a 15 year, $300,000 mortgage at a 3.00% interest rate. If you make one extra $10,000 payment at the end of each year, you’ll cut off 5 years of the total mortgage term and you’ll have a paid for house in 10 years! By cutting off those last 5 years, you’ll save almost $24,000 in interest!
The other option is taking that $10,000 each year and investing it in the stock market. Let’s assume a conservative 6% rate of return each year. That $10,000 saved for 10 years (for a total of $100,000) could turn into almost $132,000. That’s $32,000 of earnings!
In this scenario, investing your extra cash clearly nets you more money in the long run than paying down your mortgage. Why? The simple answer is because the cost to borrow money these days is so extremely low! Though it varies person to person, we’ve been seeing mortgage rates around 3% for the past couple of years. When you can borrow so much money at such a low interest rate, it makes the earning potential of the stock market so much more attractive.
At the end of the day, it’s not wrong to pay off your mortgage early. We love having clients walk into retirement with a paid for house. Even though money if so cheap to borrow for a house, there’s still something about having a completely paid for house and not owing anyone anything. We’re always big proponents of being debt free!
Let our team know if we can help walk through your specific scenario with extra cash you may have available. We’re always here to help!
Any opinions are those of Carson Odom and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information being provided does not purport to be a complete description of the securities, markets, or developments referred to in this material, nor is it a recommendation. Investing involves risk and investors may incur a profit or a loss. This is a hypothetical illustration and is not intended to reflect the actual performance of any particular security. Future performance cannot be guaranteed and investment yields will fluctuate with market conditions. Prior to making an investment decision, please consult with your financial advisor about your individual situation.