Debt is a tricky subject because typically, people feel pressure to get rid of it as quickly as possible. And when you think about your large debts, what sorts of things come to mind? Probably your house and vehicle, so it would make sense to pay those off as quickly as possible, right? Not exactly—at least, not when it comes to your mortgage.
For starters, mortgage interest is usually the lowest interest rate debt—not always, but often.
Assuming cash flow allows for the additional annual payment or a lower mortgage term length, such as 15-year mortgage instead of a 30-year mortgage, I would recommend investing the excess money or the payment difference between the 15-year and 30-year mortgages in an appropriate investment for your income, time horizon, risk tolerance, etc.
Be aware: this recommendation is predicated on your comfort level with debt. If you’re absolutely debt averse, we may accelerate—though it’s rare. Your advisor can always run side-by-side comparisons to show the difference between paying down the debt and investing.
Here are some key points to consider:
- Potential for higher rate of return in a separate investment.
- Investment, such as a brokerage account, is liquid and available to you in the event of an emergency or opportunity. While subject to market risk, this strategy provides greater flexibility.
- If invested in a liquid account like a brokerage, you can simply access the monies. If you use the money to pay down the mortgage and need access to cash and don’t have it on hand, you would need to borrow from the equity of the home. This is done after approval from the bank and is subject to prevailing interest rates.
In a nutshell, unless you have a significant cash reserve, a high monthly excess available beyond what you need to meet financial independence and other goals, I would not recommend rushing to pay off your mortgage. And, even if you did have the huge cash reserve and high monthly excess, I would still likely recommend other investment options to help accumulate wealth independent of your home.
As always, each individual investor’s situation is unique and should be evaluated accordingly. Your advisor can help you dig down into the debts you have and help you choose what to focus on paying down.