Should You Invest or Pay Off Your Mortgage?

Is it wise to pay down your mortgage and get out of that heavy debt several years early?

Or should you take the extra money you would put to principal and invest it in a mutual fund or stocks?

I asked my financial advisor, Karl Johnson, this question since it's one my wife and I have discussed. Do we put at least one extra payment per year to our mortgage or invest the money instead? We have a fixed 6% 30-year mortgage (and I'm happy with that). We've had it for 4 years now. Also, the value of our home soared in the last several years. So we have about 70% equity.

One side says get the tax deduction so don't pay off your mortgage early.

The other side says pay off the mortgage if you pay $1 in interest to get $00.25 cents in a deduction (depending on your tax bracket).

This is how Karl looked at the issue:

"It depends on the interest rate on your mortgage, adjusted for taxes, if it is significantly less than an 8% to 10% return you can get in an investment - even a mutual fund.

"Realize the mortgage is a fixed commitment while the investment is not guaranteed. However, getting an 8% return over the long term for an investment is not difficult."

Karl gave me this example:

"Let's say you have a fixed mortgage at 6% and you're in the 25% tax bracket so you subtract 1.5 for a tax deduction.

"You have a 4.5% rate.

"Now, instead of paying down your mortgage with extra payments you instead invest and get a return of 8% . . . subtract the 4.5% and you're left with a gain of 3.5%. In that case, investing the extra money instead of paying off your mortgage early makes sense.

"If you're not paying off the mortgage early then you should invest the money at a moderate risk. You have to be prudent about the investment vehicle. I'm an investor, not a speculator," said Karl. He meant he looks for solid assets that are likely to produce a return.

"The average person should be cautious. Someone who has an adjustable rate mortgage can err on the side of paying off the mortgage early."

In my opinion, my wife and I had an adjustable rate mortgage starting at 9% when we bought our first house in 1989. The cap was 14% - astounding by today's standards. In that case, we definitely would have been better off to pay down the mortgage. But today, we have a fixed rate of 6% so we could get better gains by investing in a stable mutual fund or one that's diversified with international assets.

This article from Real Estate Journal.com also weighs the pros and cons.

"Without a mortgage payment, you'll have more money to invest for the future. Your retirement savings can grow more quickly. Mortgage interest on a large or high-rate loan may be costing you a hefty sum. Instead of paying interest, you could be earning interest with your funds . . . while stowing away money in a savings account or mutual fund that earns a good rate of return sounds like a good idea, you won't make any headway with your finances unless you actually do it. If you're likely to fritter away that extra cash rather than invest it, you'd be better off financially if you pay down your mortgage instead, says Bert Langdon, a certified financial planner with Raymond James Financial Services in Houston."

So ask yourself these questions:

Do I have the discipline to invest the extra money I would have used to pay off the principal?

Do I have a lower fixed rate mortgage which would allow an investment in mutual funds or stocks to likely pay more?

Do I have a trusted advisor who can guide me in a solid and reliable investment vehicle that is not speculative?

Answering these questions will help you decide if you should pay down your mortgage and principal or invest for future gains.