Summary List Placement
Debt can often be a thorn in your side on the path to building wealth, but it’s not all bad.
Still, if you’re a homeowner with a mortgage, you’ve likely weighed the decision to pay it off early, if you can afford to. It’s a worthy goal to be free and clear of all debt, but is it the right choice if you’re trying to optimize your every dollar?
A financial planner’s recommendations
We consulted Brian Fry, a certified financial planner who founded Safe Landing Financial. He said the answer really depends on the specifics of the situation, but generally the biggest factor in deciding whether to pay off a mortgage early or invest your extra cash from a windfall, salary raise, or some other source is the interest rate.
Here are his high-level recommendations. Scroll down for the full set of assumptions he used.
Best action: Refinance and invest more aggressively, because a 15-year fixed mortgage with a rate of 2.34% is much lower than the market’s expected rate of return.
Second-best action: Refinance and pay the mortgage aggressively. If the homeowner doesn’t agree with long-term investment-return estimates and would rather act more conservatively, they can pay off the mortgage and then invest and still come out OK.
Third-best action: Don’t refinance and pay the mortgage more aggressively. The homeowner will be debt-free 100 months sooner by putting an extra $24,000 a year toward the loan balance.
Worst action: Don’t refinance, don’t invest, and spend the extra cash instead. If the homeowner did not refinance and decided to spend the money, they would not have extra retirement savings, if that’s their goal.
Second-worst action: Don’t refinance, and still invest the extra cash. A 6.15% interest rate on the loan is higher than the market’s …read more
Source:: Business Insider