Is it wise to payoff mortgage or invest money?

Asked by New buyer, Ashburn, VA Thu Aug 30, 2012

If I try to payoff mortgage (30 years loan in 15 or 16 years) by paying extra amount to principle each month, is it a wise decison? Or As we do NOT know how the housing market will be after…

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Kevin Keyser, Agent, West Hollywood, CA
Thu Aug 30, 2012
Not knowing your exact circumstances, it is hard to tell you exactly what to do, but while it may give you comfort to pay off your mortgage, you have to remember that real estate is not always a liquid asset, or at least not as liquid as some other investment options. Because money is so cheap now, at below 4%, it can often be better to leverage your assets, refinance to a lower rate, and invest your money elsewhere. Remember that often the time you might need that money for other things might not be the best time to sell, so it is not always convenient to tie up so much equity in your home.
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Mack McCoy, Agent, Seattle, WA
Thu Aug 30, 2012
I think it's wise to borrow as much money at 4% or under as possible, especially if you have other opportunities.

First off - you should have an accountant. If you're a homeowner, you should have an accountant. Talk to them about ways to plan for the future.

Here's one scenario. Inflation is a straight 2% for the next 15 years. That means that the real value of money will decline 35% - your $1000/mo mortgage payment will feel like $650 in 15 years.

If you don't prepay your mortgage, you'll owe about 2/3rds of the original amount in 15 years. However - at that rate of inflation, it will "feel" as if you're more than halfway paid off.

What is the "real" cost of your money? In the 28% tax bracket, if you're paying 4% interest on a loan, the 28% tax break knocks it down to 3%, and with 2% inflation, it's essentially 1% money.

So now the question is: can I do better than that, in real terms, with my money? Maybe an inflation-protected annuity. I don't know what you -should- do with your money, but I would strongly consider investing it outside of your house rather than inside of your house. Consider. Not "do," but "think about."

All the best,
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Peter Mohyls…, Agent, Destin, FL
Thu Aug 30, 2012
Paying off your mortgage early is always a good idea because of the money you save over the term of the loan. But you need to weigh that off against other options to invest the money. Factors like your age, how much longer you intend to stay in the work environment, What is the amount of principle outstanding, the note interest rate are all factors. I would advise you to consult a professional or... do some serious research to become an expert yourself.
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