Paying Down Mortgage Versus Making Investments
The Christian Science Monitor had an article yesterday about the pros and cons of putting extra money toward paying off your mortgage versus investing it. The financial experts they talked to basically said that if you can get a better rate of return on your investments than what you're paying on your mortgage, you should go that route. (And remember that your mortgage interest rate is not actually what you ultimately pay, because you get a bit of a discount when you deduct mortgage interest on your taxes.)
I agree, but in my house we have always taken at least a small chunk of any extra money we have to invest and paid down a little bit extra of our mortgage. As noted in the article, this can give you a little greater peace of mind, as it's nice to see debt go away. I've always seen it as a guaranteed investment as well, and an OK one when interest rates are down. If you pay down a mortgage that has 4 or 5% effective interest (the mortgage interest rated reduced by taxes), that's the same as getting a 4 or 5% return on an investment as far as I'm concerned. In the recent past, you could only get that kind of return in the stock market, as a lot of other investments paid such piddling amounts.
You don't want to go hog wild paying off your mortgage, obviously, because it's not a liquid asset, and if you have all your money wrapped up in your house, it's more difficult to get at. But putting a little extra toward the mortgage fits my goals of keeping it simple and not putting too much financial stress on myself. It's not all about the return on investment; it's also about feeling at least some level of security so you can keep your mind focused on living the life you want.
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Great topic of discussion. For young people with the option of contributing to a Roth IRA (Roth IRA has a contribution limit and income limit but they are both pretty high!), this is going to be much more effective than paying down most mortgages (assuming a reasonable interest rate like 6%).
On my page I went through the details of taking an extra chunk of change each month and paying it down versus putting it into a Roth IRA.
http://endsmeat.blogspot.com/2008/03/paying-down-your-mortgage-might-not-be.html
As a finacial controller of a law firm, I completely agree. 4-5% guaranteed is a great risk-free return. You either pay 4-5% on that debt, or you pay it off. If you don’t anticipate any short-term need for the cash, paying down your mortgage provides a great return with the added benefit of knowing you are less in debt. Opportunity Cost is a wonderfful (& profitable) concept.