In response to a particular point on my 2010 goals post — my aim to pay more money toward the principal on our mortgage each month — an acquaintance of mine posed a question: Why not take the extra $50 monthly that would go toward the mortgage principal and invest it instead? Surely we could see better returns… right?
He makes a valid point — if we invested that money in the stock market. Because heaven knows putting it into the bank or in a CD will barely net us 2%.
Also, the interest is tax deductible, and in the long term, contributions to another savings vehicle, like a 401(k) or Roth IRA, can put you ahead in the savings department. Liz Pulliam Weston makes valid arguments for this view. We’re already paying off higher-interest credit card debt (will be done in a few more months), beefing up our EF fund, and looking into life insurance.
On the flip side, paying extra on our mortgage will reduce our mortgage interest down the road. I outlined different extra payment scenarios back in September, and the idea of shaving 1, 3 or nearly 10 years off our mortgage — and saving tens of thousands of dollars in interest payments on the loan — is incredible.
The 5% interest on the mortgage is TANGIBLE — we’re getting charged it no matter what, and the interest is on a very large amount. Who’s to say how much interest we would gain if we put $50/monthly into other investments? We could make 15% interest on the investment, sure, but we could lost 15%. It’s a crap shoot, basically.
It comes down to seeing immediate results vs. long-term savings. I think for now I’ll play it by ear. Maybe it’s worth an experiment: putting that extra money toward an investment vehicle, rather than toward the mortgage principal. Good idea, or no?
If you enjoyed this post, subscribe for updates. You can also follow me on Twitter.
