Few topics cause more division among economists than the age-old debate of whether you’re better off paying off your mortgage earlier, or investing that money instead. And there’s a good reason why that debate continues; both sides make compelling arguments.
For many people, their mortgage is the largest expense they will ever incur in their lives. So if given the chance, it only makes logical sense you would want to pay it off as quickly as possible. On the other hand, a mortgage is also the cheapest money you will ever borrow, and it’s generally considered good debt. Any extra money you obtain could be definitely be put to good use elsewhere.
The reality is, however, a little less cut and clear. For some homeowners, paying off their mortgage earlier is the right answer. While for others, it would be far more advantageous to invest their money.
Advantages of paying off your mortgage earlier
- You’ll pay less interest: Each time you make a mortgage payment, a portion is dedicated towards interest, and another towards principal (we’ll ignore other costs for now). Interest is calculated monthly by taking your remaining balance, the length of your amortization period, and the interest rate agreed upon with your lending institution.
If you have a $300,000 mortgage, at a 4% fixed rate over 30 years, your monthly payment would be around $1,432.25. By the time you finish paying off your mortgage, you would have paid a total of $515,609, of which $215,609 were interest.
If you wanted to lower the total amount you pay on interest, you don’t need to make a large lump sum to make a difference. If you were to increase your monthly mortgage payment to $1,632.25 (a $200 a month increase), you would be saving $50,298 in interest, and you’ll pay off your mortgage 6 years and 3 months earlier.
Though this is an oversimplified example, it shows how even a small increase in monthly payments makes a big difference in the long run.
- Every additional dollar towards your principal has a guaranteed return on investment: Every additional payment you make towards your mortgage has a direct effect in lowering the amount you pay in interest. In fact, each additional payment is, in fact, an investment. And unlike stocks, bonds, and other investment vehicles, you are guaranteed to have a return on your investment.
- Enforced discipline: It takes real commitment to invest your money wisely each month instead of spending it elsewhere.
Your monthly mortgage payments are a form of enforced discipline since you know you can’t afford to miss them. It’s far easier to set a higher monthly payment towards your mortgage and stick to it than making regular investments on your own.
Besides, once your home is completely paid off, you can dedicate a larger portion of your income towards investments, your children or grandchildren’s education, or simply cut down on your working hours.
Advantages of investing your money
- A greater return on your investment: The biggest reason why you should invest your money instead comes down to a simple, green truth: there’s more money to be made in investments.
Suppose that instead of dedicating an additional $200 towards your monthly mortgage payment, you decide to invest it in a conservative index fund which tracks S&P 500’s index. You start your investment today with $200 and add an additional $200 each month for the next 30 years. By the end of the term, if the index fund had a modest yield of 5% per year, you will have earned $91,739 in interest, and the total value of your investment would be $163,939.
If you think that 5% per year is a little too optimistic, all we have to do is see the S&P 500 performance between December 2002 and December 2012, which averaged an annual yield of 7.10%.
- A greater level of diversification: Real estate has historically been one of the safest vehicles of investment available, but it’s still subject to market forces and changes in government policies. The forces that affect the stock and bonds markets are not always the same that affect real estate, because the former are subject to their issuer’s economic performance, while property values could change due to local events.
By putting your extra money towards investments, you are diversifying your investment portfolio and spreading out your risk. If you are relying exclusively on the value of your home, you are in essence putting all your eggs in one basket.
- Greater liquidity: Homes are a great investment, but it takes time to sell a home even in the best of circumstances. So if you need emergency funds now, it’s a lot easier to sell stocks and bonds than a home.
Misael Lizarraga is a real estate writer with a passion for teaching real estate concepts to first time buyers and investors. He runs realestatecontentguy.com and is a contributing writer for several leading real estate blogs in North America.
This analysis of the Western Washington real estate market is provided by Windermere Real Estate Chief Economist Matthew Gardner. We hope that this information may assist you with making better-informed real estate decisions. For further information about the housing market in your area, please don’t hesitate to contact me.
2018 concluded with another great year of fundraising and giving for the Windermere Foundation, thanks to the continued support of Windermere franchise owners, agents, staff, and the community. Nearly $2.5 million was raised in 2018, bringing our grand total to over $38 million raised since the Foundation’s inception in 1989! During the past year, nearly $1.9 million was donated to non-profit organizations throughout the Western U.S. that provide much-needed services to low-income and homeless families. In 2018, the Windermere Foundation fulfilled 689 grant requests and served 507 non-profit organizations.
A portion of the money raised every year is due in part to our agents who each make a donation to the Windermere Foundation from every commission they earn. Additional donations from Windermere agents, the community, and fundraisers made up 68% of the money collected in 2018. Each Windermere office has their own Foundation funds, which enable them to support local non-profits in their communities.
One organization that received Windermere Foundation donations from several Windermere Real Estate offices in the Seattle area is Treehouse. Treehouse’s mission is to give foster kids a childhood and a future. Their goal that they have set to achieve by 2022, is to see youth in foster care graduate from high school at the same rate as their peers across Washington State. And to provide them with support and a plan to launch successfully into adulthood. Donations from the Windermere Foundation have helped Treehouse clients like Ashley, get the support she needed to turn her life around.
“I didn’t have a childhood that all kids should have–like making friends my age or playing sports. I changed the path that I was on because I wanted to give people a reason to believe in me. You have to want to change and speak your truth, but you can’t do it without people believing in you. You can get through the darkest situations, you just gotta look for a little crack of light. Treehouse is that crack of light for me,” ~Ashley
2018 also marked the third year of our #tacklehomelessness campaign with the Seattle Seahawks, in which Windermere committed to donating $100 for every Seahawks home game defensive tackle to YouthCare, a non-profit organization that provides critical services to homeless youth. While the Seahawks didn’t make it past the first round of the playoffs, they did help us raise $31,900. When added to previous seasons, the total donation for the past three years is $98,700! We are grateful for the opportunity to provide additional support to homeless youth thanks to the Seahawks, YouthCare, and the #tacklehomelessnesscampaign.
Thanks to our agents, offices, and everyone who supports the Windermere Foundation, we have been able to make a difference in the lives of many families in our local communities over the past 30 years. If you’d like to help support programs in your community, please click the Donate button.
To learn more about the Windermere Foundation, visit http://www.windermere.com/foundation.
The Windermere Foundation has raised $1,611,802 so far this year, bringing the total amount raised by the Foundation to over $37 million since 1989. Through the third quarter of 2018, $1,214,576 has been donated to local non-profits and charity organizations that provide services to low-income and homeless families.
Through donations from Windermere agents, staff, franchise owners, and the community, the Windermere Foundation has been able to donate to local scholarship programs that help students in need realize their dreams of furthering their education. The following are examples of two programs that have benefitted from Windermere Foundation donations this year.
Each Windermere office raises its own funds and has a Windermere Foundation account that it can use to make donations to organizations in their local communities. This fall, the Windermere Seattle-Capitol Hill office generously donated to the Seattle Central College Foundation’s scholarship program, which is helping nearly 500 students attend the college this year, relieved of financial stress, and encouraging them to stay committed to their education.
Tammara S., the recipient of the Windermere Real Estate/Capitol Hill Scholarship, said, “I am honored to be the recipient of this scholarship… Attending school with an already tight budget was a hard decision to make. This scholarship will ease the stress of extra debt and the fear of having to choose anything over my education. Thank you, I appreciate your confidence in me and willingness to contribute to my future education.”
The Windermere Foundation general fund also made a donation to support the University of Washington Certificate Scholarship program. With the help of UW Certificate Scholarships and the Windermere Foundation, 12 local adults living on low incomes were able to start classes at the University of Washington this fall. These are just a few of the recipients:
Loree, who is studying Fundraising Management: A stay-at-home mom and active school volunteer/PTA fundraiser. Sadly, Loree recently lost her husband to cancer and has become her family’s primary provider. The certificate program will help her re-enter the workforce. “The scholarship will provide me the freedom to walk the path of discovery as I redefine who I am in this second phase of my life.”
Matthew, who is studying Wetland Science and Management: A single dad of a 6-year-old, Matthew juggles childcare with full-time work supervising Washington Conservation Corps crews in the King Conservation District. Struggling to pay rent in Seattle, his aim is to move into a better paid job, with a schedule that better lines up with his daughter’s “… and a chance to improve the stability of our natural systems in the face of overwhelming pressures like climate change.”
Syed, who is studying Data Analytics: Syed moved to the U.S. from Pakistan two years ago with a master’s degree and work experience in statistics. He is having great difficulty finding a job in his field because he has no local work experience or contacts. He is currently working at Walmart as a cashier to support his wife and 1-year-old son. “Completing this program will benefit me tremendously and help me to begin my profession, as a data analyst, in the U.S.”
Tobi, who is studying Project Management: Tobi works as a corporate relations coordinator at one of the largest food banks in King County, based in South Seattle. She wants to expand her skillset and go on to lead social impact and corporate social responsibility (CSR) programs that ensure the advancement of underrepresented communities. “The skills I learn in this program will equip me to bring more to the table in this work.”
The Windermere Foundation is proud to support wonderful programs such as these that provide continuing education scholarships to those in need. Generous donations to the Windermere Foundation over the years have allowed the Foundation and our Windermere offices to continue to support local non-profits. If you’d like to help support programs in your community, please click on the Donate button.
To learn more about the Windermere Foundation, visit WindermereFoundation.com.