Paying off Mortgage Vs. Investing

The dilemma between investing and paying off mortgage is basically a debate between whether a person is to pay off the entire mortgage in a single go, or rather invest in some other source in the coming years and keep on paying the installments till the term of the mortgage is finished. Choosing the appropriate investment channel is no doubt a difficult task, and though real estate is suggested as an option, in some of the best investments for 2011, a mortgage loan as a liability is not a very pleasing thing on a person's mind. As the economic recession is coming to an end, and several people are finding themselves in a better financial position and, 'paying off mortgage pros and cons', are being considered rather seriously. Keeping on paying installments with interest and invest in some or the investment channel or either ways paying off the entire loan amount plus the settlement charge, both have advantages and disadvantages of their own. Here's an elaboration on the two options.

Understanding the Basics

In order to make the decision properly, you will need to take a pencil and a plain piece of paper, and sit and calculate a few things, even before you consider paying off mortgage vs. investing.

Your first option is to pay off the loan and take over the house totally, without any kind of claim by investor. Now, your first step is to calculate two amounts. One, the remaining mortgage loan amount plus the redemption charge or the settlement charge. Two, calculate the total remaining mortgage and the amount of interest that is renaming (in years), this is the investment choice of debate. You will get two sums, and one sum would be greater than the other one, meaning that the lower one would be ideal choice.

The two formulas go as follows:

Early Mortgage Repayment in Toto = Total remaining repayment (+) settlement charge

Continued Mortgage and Other Investments = Total remaining repayment (+) total remaining unpaid interest

The lower one would logically be a better option. There are however several other things that you need to personally consider to reach a decision. Please note that since, this a personal decision, I would not be able to give you a verdict in the debate, the choice would entirely be yours. However, here are some essential pointers that would help you out.

Should I Pay off my Mortgage or Invest?

Here, you need an extremely practical approach and it is essential to think about all wildest and the most extreme possibilities and scenarios:

1. How much is the interest rate? Is it high, due to the credit score and is the lender a private lender, or the wrong borrowing time? Point is, there is always a possibility that the lender is charging something that is deemed to be expensive, and obnoxious. Using the percentage rate of interest, calculate what amount of your salary is spent on the interest rates. In the same manner also calculate the amount that is spent on total installment (interest + the actual installment).
2. Second off, where do you plan to invest in? Plan the investment and consider the returns of the same, and compare them with the perquisite early loan repayment option. It is my humble, yet personal recommendation that you invest only in life insurance and annuities, if you consider the investment option, avoid stocks and securities.
3. Your last consideration should be based upon what we call, 'need of the hour'. On one hand, paying off the entire loan early will help you save up on a lot of interest, however at the same time paying off the loan will drain you of almost all your current savings, which is not exactly advisable.
4. If you choose the investment and installment side, then there are two drawbacks, one you will have to keep on paying the interest and two, there is always is a risk when you invest. Thus, the point is to choose what is best suited for mortgage payments and also the situation.

Choosing between paying off and investing can be a tough decision and hence, it is advisable that you consider all the factors thoroughly and make an informed decision.