Are You Better Off Paying Your Mortgage Earlier or Investing Your Money?

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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.
Posted on July 11, 2019 at 1:35 am
Stephen Hicks | Category: Homebuyer | Tagged , , , , , ,

To Buy New or Old, That is the Question

We are often asked, “Which is the better buy, a newer or older home?” Our answer: It all depends on your needs and personal preferences. We decided to put together a list of the six biggest differences between newer and older homes:

 

The neighborhood

Surprisingly, one of the biggest factors in choosing a new home isn’t the property itself, but rather the surrounding neighborhood. While new homes occasionally spring up in established communities, most are built in new developments. The settings are quite different, each with their own unique benefits.

Older neighborhoods often feature tree-lined streets; larger property lots; a wide array of architectural styles; easy walking access to mass transportation, restaurants and local shops; and more established relationships among neighbors.

New developments are better known for wider streets and quiet cul-de-sacs; controlled development; fewer aboveground utilities; more parks; and often newer public facilities (schools, libraries, pools, etc.). There are typically more children in newer communities, as well.

Consider your daily work commute, too. While not always true, older neighborhoods tend to be closer to major employment centers, mass transportation and multiple car routes (neighborhood arterials, highways and freeways).

 

Design and layout

If you like Victorian, Craftsman or Cape Cod style homes, it used to be that you would have to buy an older home from the appropriate era. But with new-home builders now offering modern takes on those classic designs, that’s no longer the case. There are even modern log homes available.

Have you given much thought to your floor plans? If you have your heart set on a family room, an entertainment kitchen, a home office and walk-in closets, you’ll likely want to buy a newer home—or plan to do some heavy remodeling of an older home. Unless they’ve already been remodeled, most older homes feature more basic layouts.

If you have a specific home-décor style in mind, you’ll want to take that into consideration, as well. Professional designers say it’s best if the style and era of your furnishings match the style and era of your house. But if you are willing to adapt, then the options are wide open.

 

Materials and craftsmanship

Homes built before material and labor costs spiked in the late 1950s have a reputation for higher-grade lumber and old-world craftsmanship (hardwood floors, old-growth timber supports, ornate siding, artistic molding, etc.).

However, newer homes have the benefit of modern materials and more advanced building codes (copper or polyurethane plumbing, better insulation, double-pane windows, modern electrical wiring, earthquake/ windstorm supports, etc.).

 

Current condition

The condition of a home for sale is always a top consideration for any buyer. However, age is a factor here, as well. For example, if the exterior of a newer home needs repainting, it’s a relatively easy task to determine the cost.  But if it’s a home built before the 1970s, you have to also consider the fact that the underlying paint is most likely lead0based, and that the wood siding may have rot or other structural issues that need to be addressed before it can be recoated.

On the flip side, the mechanicals in older homes (lights, heating systems, sump pump, etc.) tend to be better built and last longer.

 

Outdoor space

One of the great things about older homes is that they usually come with mature tress and bushes already in place. Buyers of new homes may have to wait years for ornamental trees, fruit trees, roses, ferns, cacti and other long-term vegetation to fill in a yard, create shade, provide privacy, and develop into an inviting outdoor space. However, maybe you’re one of the many homeowners who prefer the wide-open, low-maintenance benefits of a lightly planted yard.

 

Car considerations

Like it or not, most of us are extremely dependent on our cars for daily transportation. And here again, you’ll find a big difference between newer and older homes. Newer homes almost always feature ample off-street parking: usually a two-care garage and a wide driveway. An older home, depending on just how old it is, may not offer a garage—and if it does, there’s often only enough space for one car. For people who don’t feel comfortable leaving their car on the street, this alone can be a determining factor.

 

Finalizing your decision

While the differences between older and newer homes are striking, there’s certainly no right or wrong answer. It is a matter of personal taste, and what is available in your desired area. To quickly determine which direction your taste trends, use the information above to make a list of your most desired features, then categorize those according to the type of house in which they’re most likely to be found. The results can often be telling.

If you have questions about newer versus older homes, I can help you, let’s talk!

Posted on June 12, 2019 at 1:29 am
Stephen Hicks | Category: Homebuyer | Tagged , , , , , ,