Should you pay off your mortgage first, or invest first? That’s a question being asked and debated a lot. In this post let me walk through a few key points to consider when making this importatnt financial and life decision.
Let’s look at the numbers first
First, mathematically, you should compare the mortgage interest rate, with the expected investment return (post expense and tax). If you have a 2% fixed interest rate on your mortage, and you can get 6% return on your investment, then perhaps it’s worthwhile to consider investing the money because your gain (6%) is much higher than your interest payment (2%). P.S. When you calculate your investment return, don’t forget to remove the expenses and taxes you paid for the investment.
New era of high interest and (potential) low return
However, don’t forget we are now entering an era of high interest environment where mortgage interest rate can be 5% or higher. On the other hand, investment return has become uncertain as we have already been through a decade of high return in the market. So do you still expect investment return outweights mortgage interest rate?
Most importantly, the psychology side of the coin
Above are only the maths. We are human with hearts and emotions, not robots or computers. So having a peace of mind and good nights of sleep are often more important than getting the highest returns. If you can sleep better with a fully paid off house, then you should consider paying off the loan first. Studies have shown after fully paying off mortgages, people generally are in a much better pyschological state, more relaxed, productive, creative, and more willing to take risks, which potentially leads to greater returns in the long run!
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