Recently the personal finance website MoneyGeek asked me to answer some questions related to paying off your mortgage. Following are my responses.
Pay off Your Mortgage or Invest:
Question: Did the data from the study surprise you? (The study claimed paying down your mortgage was a better investment strategy than putting that money into the stock market). Why is it they think paying down a mortgage outperformed the S&P 500?
My response: The data did surprise me, but the study does say that the study is not complete. It says, “Our initial analysis above doesn’t factor in the impact of taxes.” The tax benefit of mortgage deductibility is substantial. The tax savings can be used to invest in the stock market. There are too many variables for anyone to use this article as a guide, and further, when looking at planning your financial future, you need to be looking forward, not back. The past is not necessarily a predictor of the future.
Question 2: Many people do a mix of both (pay down their mortgage and invest in stocks). One reason I can think of is that it’s good to have some liquid investments, even if those liquid investments are at the whim of the stock market. Is there a good middle-of-the-road option that financial advisors would recommend? That is, for the extra funds that you have coming in (after emergency fund, retirement matches, etc., would you devote 80% to the mortgage and 20% to the stock market?
My response: Paying down your mortgage is a “feel good” strategy. It feels really good to see your equity go up, and your debt go down. However, investing in the market as opposed to paying off your mortgage has some advantages. First, it gives you liquidity to take advantage of opportunities or for emergencies. Also, having funds in a brokerage account will help you get a new mortgage (lenders like borrowers to have cash reserves). In addition, with money in a brokerage account, you can move it from one investment to another, to take advantage of market opportunities. Finally, if you build up enough of a balance you can pull money out of your brokerage account and buy a rental property, and now you have steady passive income.
Question 3: What do you think of new real estate investment opportunities like Fundrise? Might they offer good returns, and could they be a good chance for those who aren’t homeowners or don’t see homeownership in their near future to see the same ROI as those with mortgages?
My response: These new real estate investment opportunities like Fundrise are great because they allow an average person to participate with other small investors in major real estate projects, which in theory should provide more opportunity and lower risk. However, real estate is a long-term investment. You make the most money if you can hold onto the investment over many years, because just like the stock market, the real estate market goes in cycles. So, whether you buy a house, buy rental properties, buy real estate stocks, or put money into funds like Fundrise, invest continually and hold you position for a long time, to build wealth.
You can see the original post at: https://www.moneygeek.com/mortgage/pay-off-your-mortgage-or-invest/#expert=michael-manahan
The study referenced in Question 1 can be found at: https://www.moneygeek.com/mortgage/pay-off-your-mortgage-or-invest/