Most people have one mortgage, the rich have two.

I get asked the question often: “I have extra cash, should I put it toward paying down my mortgage?”

The short answer is sure, but no. Confused? Don’t be. The answer inevitably lies with your goals and feelings about money.

Typically, we steer clear from emotions when making a financial plan but some decisions can be made with your peace of mind at the forefront of your decisions making. One of those financial forks in the road is where to put extra cash within your portfolio. 

Should you put “extra” money towards paying down your mortgage? There are two main avenues to consider when making this decision. First, does it make fiscal sense? That answer depends on a few factors:

• What is your current interest rate? If you have a low rate mortgage, as most people do right now, you are paying around 4% interest or less.
• Do you have additional debt with higher interest rates? These should be paid down first.
• How much time do you have? Are you nearing retirement? Still 20-30 years from the end of your career? This makes a difference. 
• Do you have an emergency savings fund established and funded should you need to change jobs, move, etc.?
• Are you saving for retirement, education and other goals?

If you have a low interest mortgage, no debt with higher interest rates, are still far from retirement age, have an emergency fund and retirement savings, then you truly have extra cash. Congratulations! This is where the quote above, “most people have one mortgage, the rich have two” comes into play. Financial stability allows for the freedom of borrowing at a lower interest rate in order to invest at a higher rate of return.

Let’s start by looking at some crude numbers to demonstrate the financial ramifications of real estate investment (in your home) vs. market investment:  

• A house bought outright in 1995 for $73k and sold in 2015 for $460k made 6.3x return.
• In that same 20-year time, $1k invested in the stock market in 1995 yielded a 6.5x return.

A slight difference, until you factor in that the house cost money to maintain. There were taxes to pay, insurance, and upkeep. So was it really a 6.3x return? Very likely, not. Whereas, the money in the stock market just sat there, ignored for years and still managed to make 6.5x return.

So the long-term math argument to invest in the market vs. paying down your mortgage is sound. That’s not to say it is the right decision. Here are a few reasons why paying down your mortgage could be an excellent choice for you:

1. If you pay down your mortgage, you get a guaranteed return (whatever the rate of interest you are paying).
2. You have flexibility. You can stop and start extra payments anytime you want (instead of waiting to pull cash out of brokerage accounts).
3. It feels good. This one can’t be discounted. A lot of people sleep better at night knowing their money is going into something they eat, sleep and live in day-to-day. 

What you choose to do with extra money is completely up to you, just don’t hold it in cash. Make your money work for you. 

Learn more about Mike and my services at https://www.mortonfinancialadvice.com and connect at https://www.linkedin.com/in/mwsmorton/

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