Tuesday, May 15, 2007

Pay Down the Mortgage or Invest?

What should you do with your extra cash? Pay down the mortgage or invest? This is a common dilemma that many people have and I think the right answer depends on the individual and their unique situation, lifestyle, investing strategy etc... So I’m not going to say one is better than the other…instead I’ve gone over my own situation and here is what works for me.

Personally, I pay the minimum amount on my mortgage and take all of my extra money and invest it in the market. I’ve chosen to do this because I currently have a low 5 year fixed interest rate (5%) and believe that over time I’ll be able to do better in the market. Part of my strategy is to pay the same in mortgage, maintenance and taxes as I would if I chose to rent. That has been my strategy since I bought my house and as such pay a few hundred dollars less a month than a friend who rents a similar sized house in a similar neighborhood. As rents go up in my city I intend to increase the amount that I’m contributing to my mortgage. This strategy would obviously not work for everyone. It took me quite a while to find a house that was both comfortable enough for my wife and would allow my monthly house expenses to be comparable to rent (I ended up buying a semi-attached home from a couple on the very brink of bankruptcy). Additionally, I don’t plan on adding any fixed income to my portfolio. However, if I did I would probably use the fixed income portion of my portfolio to pay down the mortgage as both the long and short term fixed income rates are so low.


moneygardener (AKA investor99) said...

Great minds think alike with you and jungle guy I guess....weird.

I employ a similar strategy as you do except my 5 year rate is 4.5% and I pay bi-weekly to accelerate the ammorization.

Middle Class Millionaire said...

I forgot to mention it on my post but I also pay bi-weekly I don't have the exact numbers but I think bi-weekly payments knock about 4 years off the 25 mortgage.


FinancialJungle.com said...

Have you considered Flintstone Flip/Smith Manoeuvre? Pay down the mortgage with your cash/investments, and take out a HELOC to purchase the investments. Basically everything is the same except you pay less taxes.

Middle Class Millionaire said...

I've considered it however, I plan on moving in the next 1 to 2 years and do not want to bother with it at this point. Once I move I will definitely be looking seriously into it though.

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why not a little of each.

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