Should I pay off mortgage or invest?

Key takeaways

  • There are many factors to consider when deciding to pay off your mortgage early.
  • Going mortgage-free can have a negative tax impact.
  • A financial professional will take your financial circumstances into account and advise you on the most relevant options.

A common question that people wrestle with when they have extra cash is whether to play it safe and pay off their mortgage or take a bigger risk and invest it in hopes of generating a bigger return.

That question is timelier than ever these days. Despite market volatility and economic challenges related to the COVID-19 pandemic, Americans are sitting on tremendous amounts of capital. According to the FDIC, deposits held in U.S. banks reached a record high of more than $18 trillion at the end of Q1 2022.

The question of what to do with available capital arises more frequently during times of uncertainty, as well as instances where individuals receive an influx of cash, such as from the sale of a business, a bonus or an inheritance. What’s the most beneficial financial move, and where can investors get the best incremental lift in growing their net worth and overall wealth?

There are a number of factors that can influence whether you decide to pay off your mortgage early, such as your mortgage interest rate and the amount you have left to pay off. But making that decision is complicated and requires a deeper dive into your personal financial situation, goals and objectives, and your risk tolerance.

“We can look at the numbers until we’re blue in the face and quantify why you should or shouldn’t use that money to pay off your home, but it all comes down to your personal comfort level and risk tolerance for your financial security,” says Matt Hosken, Wealth Planner for U.S. Bank Private Wealth Management.

Pay off mortgage early or invest: Look at the bigger picture

Choosing whether to use extra money to pay off a mortgage or invest depends on your individual circumstances.

“Often, when we’re engaging with a client, they are posing a specific question or scenario, such as ‘Should I use this extra money to pay down my mortgage?’ It’s very important to take a step back and redefine what their overall strategy is and how this decision could impact their asset base and tax situation,” says Steve Kim, Private Banker for U.S. Bank Private Wealth Management.

With your complete financial strategy in mind, a financial professional can help you narrow down what could be hundreds of scenarios to a handful of relevant ones, and then assess each one’s probability of success by delving into the pros and cons of different choices.

For example, if you have $500,000 available, you have a number of options. You could decide to use that money to pay off your mortgage, invest it in a new property or invest in the stock market. Or, instead of using the whole amount for one purpose, you could use $100,000 for the down payment on an investment property with a mortgage that is structured as an interest-only loan. The balance of the money could be used to invest elsewhere, pay off a portion of your home mortgage and still hold extra cash in short-term investments to preserve liquidity.

Other options to consider could include buying a rental property or using the money to provide a low-interest loan to your business. “We make sure we’re advising our client appropriately and customizing the information, guidance and resources we are providing so that it fits their unique situation,” Kim says.

Avoid potential pitfalls of paying off your mortgage early

A mistake people sometimes make is paying off their mortgage without considering the ripple effects of that decision. For example, paying off a mortgage means you lose a big tax deduction. People also assume that just because they have had a mortgage in the past, they can easily get a mortgage tomorrow if need be.

“It’s very important to take a step back and redefine what your overall strategy is and how this decision could impact your asset base and tax situation.”

-Steve Kim, Private Banker for U.S. Bank Private Wealth Management

“You may think it’s easy to get financing down the road, but don’t assume that will always be the case,” says Anish Singla, Mortgage Loan Officer for U.S. Bank Private Wealth Management. “If you’ve spent your available cash and something comes up where you need the money, it may take you 60 to 90 days to refinance your home, or you may not be able to get approved.”

Paying off your mortgage early: The importance of good advice

As with any major financial decision, it’s important to get advice from a qualified professional who understands your full financial picture. They can help you understand what questions need to be addressed, as well as present alternative options to paying off your mortgage early.

“If you have a financial professional who is just focused on a transaction or taking an order, you might not be taking full advantage of all the different options that are out there,” says Douglas Eisenman, Portfolio Manager for U.S. Bank Private Wealth Management. “Even a minor change can create a massive cost or savings difference.”

Sometimes, people get financial “tips” on what to do with their money from a variety of sources, whether it’s friends, family or their dentist. “It might be great advice, but if they only see a part of your financial picture, it’s like playing a game of telephone. There’s a lot of information missing that could lead to poor results,” says Reza Sarem Aslani, Private Wealth Advisor for U.S. Bank Private Wealth Management. “Working with a team with depth of experience helps you to think about different solutions.”

“We’re here to help clients from an advisory perspective,” Kim adds, “and oftentimes that means collaborating with other team members who have expertise in different areas, such as financial planning, portfolio management and mortgages. Although every piece of the puzzle is great in itself, we put all that together and bring all of those resources to the client to help make their decision as informed and as easy as possible.”

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