A large number of homeowners are in a dilemma to take an investment decision with their extra cash. They cannot decide whether they should pay down their mortgage or take advantage of the low rates and invest the money in stocks.
Well, there can't be a straight forward answer to this. It will completely depend upon the individual in order to determine which will be more advantageous to him/her – pay down mortgage or invest in stocks. While doing so, the individual should keep in mind the mortgage rates, mortgage interest deductions, etc. The age and financial goals of the individual will also play an important role in this regard.
So, what things should you consider when you take the decision? Let’s take a look:
Young homeowners who are just starting out
If you're a young homeowner and if you're fortunate enough to have extra cash, then you can think about investing the money for better returns in stocks. You won't have to support the education of your children. Thus, due to your age, you may think about taking risky investment. But if you haven't yet paid off your student loans, then it will be better to pay off the student loans with the extra cash. Also, you may use the extra dollars to create an emergency fund rather than paying off your mortgage.
Middle-aged homeowners
If you're a middle aged homeowner, there are various things that will influence your decision. If you've kids, then you should think about keeping the funds liquid rather than investing it. The liquid funds will help you finance your kid's education. If you put down your money to pay off the mortgage, then you won’t be able to take the money out when you require it.
You should also consider investing the extra dollars in the retirement savings, especially Roth IRAs or Roth 401(k)s, before deciding to pay down a home loan. You will get tax advantages if you're investing in Roth IRAs or Roth 401(k).
Senior homeowners nearing retirement
The financial advisers will always recommend paying off the house before you retire from your job. Thus, if you've extra cash, you should pay down your mortgage. Paying off the mortgage in full, prior to retirement, will be a great relief as you'll be able to get rid of your largest monthly expense.
If you don't have extra funds, you should try to put down an extra $100 a month toward your loan. If you've a 30 years mortgage, then you should take advantage of the lower rates and refinance the loan for a 15 year term. This will help you in saving money and you will be debt free sooner. Once you pay off the balance amount, you can then think about investing in stocks and bonds.