When it comes to managing your finances, one of the most important decisions you’ll make is what to do with any extra money you have. Two popular options are putting extra money into your mortgage or investing it. Both options have their pros and cons, and the right choice for you will depend on your individual financial situation and goals.
Understanding Your Mortgage
Before we dive into the pros and cons of putting extra money into your mortgage, it’s essential to understand how your mortgage works. A mortgage is a loan from a lender that allows you to borrow money to purchase a home. In exchange, you agree to make regular payments, usually monthly, which typically include both interest and principal.
The interest portion of your payment is the cost of borrowing the money, while the principal portion goes towards paying off the loan balance. Over time, as you make payments, the amount of interest you owe decreases, and the amount of principal you pay increases.
How Extra Payments Work
When you make extra payments on your mortgage, you’re essentially paying more than the minimum required payment. This can be done in a few ways:
- Making a lump sum payment
- Increasing your regular monthly payment
- Making bi-weekly payments instead of monthly payments
Extra payments can be applied to either the interest or principal portion of your loan. If you’re trying to pay off your mortgage faster, it’s usually best to apply extra payments to the principal.
The Pros of Putting Extra Money into Your Mortgage
There are several benefits to putting extra money into your mortgage:
- Paying off your mortgage faster: By making extra payments, you can pay off your mortgage faster, which can save you thousands of dollars in interest over the life of the loan.
- Reducing your debt: Paying off your mortgage is a great way to reduce your debt and free up more money in your budget for other expenses.
- Building equity: As you pay down your mortgage, you’re building equity in your home, which can be a valuable asset.
- No risk: Putting extra money into your mortgage is a low-risk investment, as you’re essentially paying off a debt.
The Cons of Putting Extra Money into Your Mortgage
While putting extra money into your mortgage can be a good idea, there are some potential downsides to consider:
- Opportunity cost: By putting extra money into your mortgage, you may be missing out on other investment opportunities that could earn a higher return.
- Liquidity: Once you’ve put extra money into your mortgage, it can be difficult to access that money if you need it for other expenses.
- No tax benefits: Unlike some other investments, such as retirement accounts, there are no tax benefits to putting extra money into your mortgage.
Understanding Investing
Investing is another popular option for using extra money. Investing involves putting your money into assets that have the potential to earn a return over time. There are many different types of investments, including:
- Stocks
- Bonds
- Mutual funds
- Exchange-traded funds (ETFs)
- Real estate investment trusts (REITs)
How Investing Works
When you invest, you’re essentially buying a small piece of an asset. Over time, the value of that asset can increase, earning you a return on your investment. There are many different ways to invest, including:
- Buying individual stocks or bonds
- Investing in a mutual fund or ETF
- Using a robo-advisor
The Pros of Investing
There are several benefits to investing:
- Potential for higher returns: Investing can earn a higher return than putting extra money into your mortgage, especially over the long-term.
- Diversification: Investing allows you to diversify your portfolio, which can help reduce risk.
- Liquidity: Many investments, such as stocks and mutual funds, are liquid, meaning you can easily access your money if you need it.
- Tax benefits: Some investments, such as retirement accounts, offer tax benefits.
The Cons of Investing
While investing can be a good idea, there are some potential downsides to consider:
- Risk: Investing always involves some level of risk, as the value of your investments can fluctuate.
- No guarantees: Unlike putting extra money into your mortgage, there are no guarantees when it comes to investing.
- Fees and expenses: Many investments come with fees and expenses, which can eat into your returns.
Which is Right for You?
Ultimately, whether you should put extra money into your mortgage or invest depends on your individual financial situation and goals. Here are a few things to consider:
- Emergency fund: Do you have an emergency fund in place? If not, it may be a good idea to prioritize building one before investing or putting extra money into your mortgage.
- High-interest debt: Do you have high-interest debt, such as credit card debt? If so, it may be a good idea to prioritize paying that off before investing or putting extra money into your mortgage.
- Financial goals: What are your financial goals? If you’re trying to pay off your mortgage faster, putting extra money into your mortgage may be a good idea. If you’re trying to build wealth over the long-term, investing may be a better option.
By considering these factors and weighing the pros and cons of each option, you can make an informed decision that’s right for you.
| Option | Pros | Cons |
|---|---|---|
| Putting extra money into your mortgage | Paying off your mortgage faster, reducing your debt, building equity, no risk | Opportunity cost, liquidity, no tax benefits |
| Investing | Potential for higher returns, diversification, liquidity, tax benefits | Risk, no guarantees, fees and expenses |
By considering these factors and weighing the pros and cons of each option, you can make an informed decision that’s right for you.
What are the benefits of putting extra money into my mortgage?
Putting extra money into your mortgage can have several benefits. For one, it can help you pay off your mortgage faster, which can save you thousands of dollars in interest payments over the life of the loan. Additionally, making extra payments can also help you build equity in your home faster, which can be a great feeling knowing that you own more and more of your property.
Another benefit of putting extra money into your mortgage is that it can provide a sense of security and stability. Knowing that you are making progress on paying off your mortgage can give you peace of mind and reduce financial stress. Furthermore, if you ever need to access cash, you can always consider a home equity loan or line of credit, which can provide a low-interest way to borrow money.
What are the benefits of investing my extra money?
Investing your extra money can also have several benefits. For one, it can provide a potential for higher returns than putting extra money into your mortgage. Historically, the stock market has provided higher returns over the long-term than the interest rate on most mortgages. Additionally, investing can also provide a way to diversify your assets and reduce your reliance on any one particular investment.
Another benefit of investing is that it can provide a way to build wealth over the long-term. By investing regularly and consistently, you can take advantage of compound interest and potentially build a significant nest egg. Furthermore, investing can also provide a way to achieve long-term financial goals, such as retirement or a down payment on a second home.
How do I decide between putting extra money into my mortgage and investing?
Deciding between putting extra money into your mortgage and investing depends on your individual financial situation and goals. If you have a high-interest mortgage and are trying to pay it off quickly, putting extra money into your mortgage may be the best option. On the other hand, if you have a low-interest mortgage and are looking for a way to build wealth over the long-term, investing may be a better choice.
It’s also important to consider your overall financial situation and goals. If you have high-interest debt, such as credit card debt, it may make sense to focus on paying that off before putting extra money into your mortgage or investing. Additionally, if you don’t have an emergency fund in place, it may make sense to focus on building that up before investing.
Can I do both – put extra money into my mortgage and invest?
Yes, it is possible to do both – put extra money into your mortgage and invest. In fact, this can be a great way to achieve multiple financial goals at the same time. By putting extra money into your mortgage, you can pay off your mortgage faster and build equity in your home. At the same time, by investing, you can build wealth over the long-term and achieve other financial goals.
One way to do this is to split your extra money between your mortgage and investments. For example, you could put 50% of your extra money towards your mortgage and 50% towards investments. Alternatively, you could put a fixed amount towards your mortgage each month and invest any additional money that you have.
What are some common mistakes to avoid when deciding between putting extra money into my mortgage and investing?
One common mistake to avoid is not considering your overall financial situation and goals. It’s easy to get caught up in the idea of paying off your mortgage quickly or building wealth through investing, but it’s also important to consider other financial goals and priorities. For example, if you have high-interest debt or don’t have an emergency fund in place, it may make sense to focus on those areas first.
Another common mistake is not considering the potential risks and returns of investing. While investing can provide a potential for higher returns than putting extra money into your mortgage, it also comes with risks, such as market volatility and the potential for losses. It’s also important to consider your own risk tolerance and investment horizon when deciding whether to invest.
How can I get started with putting extra money into my mortgage or investing?
Getting started with putting extra money into your mortgage or investing is easier than you think. If you want to put extra money into your mortgage, you can simply make an extra payment each month or consider a bi-weekly payment plan. If you want to invest, you can start by opening a brokerage account or considering a robo-advisor.
It’s also a good idea to talk to a financial advisor or planner who can help you determine the best course of action for your individual financial situation and goals. They can help you consider your options and make a plan that works for you. Additionally, there are many online resources and tools available that can help you get started with investing or paying off your mortgage.