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mannix_mannix_mannix | If I have an extra $1000 a month, is it better to pay down my mortgage or invest in index funds? |
My home loan is at 6.5%, but paying an extra thousand a month will cut about 15 years off of my loan. However, I also realize I stand to gain a lot of compound interest investing that $1000 every month by just putting it into an index fund. The thing that has me wondering is if I pay down my home loan that much quicker, than I have that much more to invest from that point on.
Which is perceived to be the smarter plan and why? |
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Melody S
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The absolute smartest thing is to invest the money in a well diversified portfolio of stocks and bonds...probably easiest through mutual funds...with a good portfolio you can reasonably expect around 9-10% return over the long term (and this is probably pretty Conservative). That alone makes it a better choice then paying down a debt at 6.5%; however, when you factor in that you can deduct your home interest on your income taxes that lowers the effective interest rate even more. I've gone through the math with many clients and it is almost always a better option to save now and let your money grow and use the power of compounding interest.
With all that being said though if it would make you feel better to pay off the mortgage early you have to take that into account as well....Life is not simply about numbers....peace of mind and such has to be taken into account as well...a good compromise might be to save $500 and pay an extra $500 toward the mortgage. |
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tikitiki
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First check your mortgage papers. A lot of times they'll charge a fee if you pay too much towards your payment, or pay off a loan early. Read the fine print.
I can't say which is better, you have a good point both ways. Sorry can't help there.... |
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pink daisy
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Put some money towards your principle and interest/ |
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Quixotic
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The real question is: will the index funds return more than your cost for the mortgage? Given the tax benefits of a mortgage, your cost is probably around 4%/year for each dollar owed.
Given that the long term return for the SP500 is greater than 10%/year, I believe the answer is that investing in index funds would be better. But you have to be prepared for a bumpy ride, some years you will lose a good bit of money, but on average you will make more than 10%, or 6% more than your mortgage cost.. |
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ykchen913
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The answer depends on a few factors:
(1) what is your tax bracket?
(2) what is your expectation of investment returns from the stock market?
(3) do you need some mid-term cashes?
The investment gains in the stock markets are often taxable. However, your mortgage interests are often tax deductible. Therefore, your expected stock market gain of 10% per year could be the same as 6.5% mortgage interest rate. So, if your expected investment returns is less than 10%, then it probably better to pay your mortgage.
Some conservative financial advisor suggests you pay off the mortgage first. This is because you are borrowing money to invest. Unless you are a good stock market investors, your risk is much higher of not paying the mortgage. Some aggressive financial advisor, on the other hand, suggests that you invest in the stock market. This is because higher risk often means higher returns.
Furthermore, if you need extra cashes two or three years later, then you should consider stock market. It is easier to liquidate.
For your reference, I put my extra money in the stock markets so that I can have extra cashes easily if necessary. And, it is probably important for you to lower your mortgage interest rate; 6.5% seems high. |
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Dotch
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If you can earn more return by investing in an index fund, then your answer it to devert monies to investments. However, you need to look at the average return of the index fund over the past 1-3 years to determine if it is worth the risk. It is all about your risk profile and your aversion to debt. Personally, reducing debt is always my goal. Plus, you will could potentially build your net worth faster by paying debt down. |
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UNIQUE
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pay off the mortgage!!!
is a biiiiiig freedom |
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josh_jeckel
 |
Buy stocks
your mortgage isnt really going to go down that much on a 1000 bucks a month. I am sure if you put 12,000 a year in stocks you can get a better return than the amount you would be saving on your mortgage.
do the math, 1000 a month towards principal = how much interest savings a year.
then look at how much you can make on stocks or a money market a year. But youll get all your money back in your mortgage anyway when you sell it |
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jassybaby
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i think you should pay off your mortgage because stock will always be there but where you stay may differ...so first things first mortgage than have fun with it after that's taken care of ......... |
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mel
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A personal decison, but I would pay off the mortgage sooner so I am debt-free quicker. |
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kperry1911
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Why not a bit of both... Pay off the mortgage with half and invest the other half.
Two things to note: Mortgage is one of the few debt's that not considered "bad debt". What's meant by this is that the interest is generally tax deductible, unlike interest on car loans or credit cards. Plus your home is an investment that should appreciate with time. In some situations where you might move to a new home before the mortgage is paid off, you may stand to make money just from the appreciation of property value above and beyond what you owe on the mortgage.
Second, Investing in a mutual fund or ETF regularly will allow you to dollar cost average into investments and lessen the effect of having to time the market. My only concern is that you understand what you are doing. Index funds, or any non-money market funds don't have a "rate" of return. They have returns measured by change in price from 1 period to the next + any possibly distributions. Over the long-term a diversified portfolio, or index will give you returns greater than just having your extra cash socked away in a bank account, but just be aware that there is no guarantee.
In the end it's your decision, so paying off the mortgage, investing, or a combination of both all sound like pretty good ideas. Sounds like you have a good situation to work with having the extra cash.
-good luck. |
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philip r.
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buy a movado watch |
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Trevor M
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bah, spend it on a really nice TV!!! |
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Agueda F
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I think you could to pay a part of mortgage and rest to look at FOREX market.
take a look at
http://www.finanzasforex.com/prg...
they are a Private Club of Investments and offer very high interest funds. (+10% month)
They have more 3000 investors just in this moment.
you can gain access now for FREE. |
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Depressed Champion
 |
I think investing is the way to go. what kind of return would you be getting? If you invest it wisely you would probally be able to pay off your house even faster. I happen to manage a foreign exchange acount and can get you any where from 5 -30% a month. That's just an option to look at. Or there are a lot of other investment opportunities. I actually pay for a house completely off returns from investing but that's another story. Just make sure you make good investments and do your homework. |
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Frank Castle
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Any decent Mutual Fund will return at least 20% annually. |
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kfjads k
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Hmm...
I believe so, but check here just in case:
http://answers.yahoo.com/question/index?qid=20070508215629AAffDnR&pa=FYd1D2bwHTHwI7JgHOw.SMwKGD9LKoKg8n5_DFGyfoGhdQ--&paid=asked&msgr_status= |
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