Should I pay off my mortgage early or invest? You will inevitably confront this question in your search for financial security. The most intuitive answer is, it depends.
With mortgage rates sitting near record lows, one would figure the return on an invested dollar should exceed the guaranteed savings from making additional payments on a home. It’s an opportune time to take advantage of today’s low rates and aggressively pay down your mortgage to become mortgage free sooner. However, with the current interest rates at historical lows and if you’re a savvy investor, borrowing at the low 2% rates that are available today to invest for higher returns may also be an opportunity to make money and plan ahead.
We have clients that contact us on a regular basis to take out their home equity at low rates, and then invest with their financial planners for higher returns where they can get up to 8% or more. There are mortgage investment opportunities where you can lend your money secured against real estate for a safer investment. For example, if you were to borrow $100,000 at 2.5%, the interest that you would incur for a one year period would be approximately $2,500 however, you could in turn either invest it in something with a higher return say 8.5%, and receive over $8,800 a year in interest plus sometimes additional fees, the result could be net interest earned of over $6,300 per year.
Another alternative that home owners look to explore is purchasing an investment property. With a $100,000 equity take out to purchase a $500,000 investment property, you would essentially be financing the property at 100% (20% from the equity of your home, 80% financed on the investment), during the first 5 years alone, the monthly interest portion of the investment would be approximately $900 per month, plus the interest from the home equity of approximately $210, add your property taxes of $200 and maybe $200 for maintenance or insurance, and you would be looking at fixed costs of approximately $1,510. However, here is where it starts to make sense:
Say if you were to rent out the investment property for $2,500 per month, you could generate a net profit of almost $1,000 per month plus the average of 7% annual appreciation in property value over the life of the loan. You could have the mortgage on the investment property paid off for you over 25 to 30 years and have a property free and clear for retirement or your kid’s inheritance.
If you would like to go over any investment ideas that you would like to explore using your home equity, please contact me and I would be happy to help.
