I have $100,000 in savings -- should I pay off part of my mortgage or invest?

Question

I have $100,000 in cash and want to know the smartest think to do with it. Some folks say I should pay off part of my home mortgage, which has a $323,000 balance and 27 years left. Assuming that's the smartest thing to do, is it better to decrease my monthly payments, or keep them the same and shorten the length of time that I owe?

By the way, I have no other debts (no car / credit card debt).

Answer 1

It depends on many different factors. What interest rate are you paying on the mortgage? Are the mortgage payments comfortable? Why kind of mortgage is it? If it is an ARM, what are the interest rate limits on it? Are there any prepayment penalties on the mortgage? How long do you plan on staying in the house? How is the real estate market doing in your area? If it is doing good then the value of the house should be going up and that can be an investment in itself. If you are planning on selling it in a couple of years then putting the money into another investment may be a better idea. How valuable is the security of having your home paid off to you? That $100,000 will go a long way towards paying your home off. In fact, see if you can refinance with the $100,000 payment and get a faster loan. Maybe a 15 year loan. Pay off the house faster and the bank cannot take it away from you and also the payments that you were paying on the house can now be used for other investments.

What kind of investing are you talking about? How much risk are you willing to take? Can you stand to lose the entire $100,000 or do you want to guarantee that it will be preserved? The decisions will change what kind of return on investment you are likely to get.

Are you planning on investing in stocks, bonds, mutual funds? What kind of return do you expect to get on these? Are you going with a little safer investment such as government bonds, CDs, FICA insured savings accounts? If you do that then you will protect your original investment but you will get less return.

Are you planning on opening your own business or investing directly in someone's business? That can be a fairly risky manuever but can pay off pretty good too. You do stand the chance of losing a lot of money but many millionaires got their money thru businesses that they ran. This tactic requires you to have some real business smarts and be a patient and hardworking person. If you do not have these skills then you may want to avoid running your own business until you can develop them.

How fast do you want to be able to get the money back? If you need it to be available fairly quickly then you need to go with stocks or mutual funds or something that is a more liquid investment. You can get your money out of the house but it takes time. It takes time to get an equity loan on your house.

Ok, now, lets boil all of this down. Compare the rate of return that you can reasonable get from investing the $100,000 and the interest that you would save by putting the $100,000 into the mortgage. Which gives more money? Is it a considerable amount? If so then go with that? If there is not a big difference then go with the mortgage. Reducing the debt is usually a pretty good idea. Of course, take all of the other factors and think about them. This is not a black and white question. It will have different answers for different people depending on their circumstances.

Also, do not let the idea of a tax benefit on the mortgage prevent you from paying into the mortgage. You do get taxes reduced but you are still paying interest. It is like saying that you are happy on a loan with an interest payment of $1 because after the tax benefit it becomes $.80 instead of paying off the loan and paying $0 in interest.

Kudos to Jason D. He mentioned something that I forgot. What do you have stashed away for emergency savings? How long can you last right now if you lost your job and could not find another one? What if your car stopped working and you needed to buy another one? How well can you do that? That is another very smart choice here. Put money in a safer investment and have it become your emergency fund. Take the rest and figure out what to do with it.


Watch out for scams wanting your money. If the company cannot explain in depth how they make money then treat it like a scam. An example would be the Aid4families person below. If the investment is going to return money then that money has to come from somewhere. Is it coming from a business? Is it coming from commodities? Are they running drugs and guns across the border? The money has to come from somewhere.

Go to the site and read it and they do not tell you how they can give such gigantic returns. Here is something to think about as well, if they were legit and you put $100,000 in their company and let it ride and reinvest all of the gains, then in 1 year you would have over $300,000. If you were in for 5 years then you would have over $30,000,000. If you were in for 10 years you would have $9,000,000,000. Do you see what is going on here. They are making claims that they cannot possibly keep. If you give them $100,000 now then in ten years you will be a billionaire 9 times over? There is no evidence to support that they have been able to maintain a return of pay like they claim. I would not be suprised to find out that this was some sort of Ponzi scheme.

Some links for you

http://answers.yahoo.com/question/index?qid=20070422130230AABm5UU&show=7

http://www.scam.com/showthread.php?t=16899

http://en.wikipedia.org/wiki/Ponzi_scheme

Answer 2

Pay your mortgage down, but don't put all $100K into it. The very first thing you should do - always do - is try your best to eliminate as much of your debt as possible. You could also split the difference, and invest a portion of your savings, so as not to completely eliminate your liquidity. Remember, the housing market isn't so great right now; and nothing is a sure bet. You may only break even after inflation when you decide to sell the house.

If it were me, I would keep at least six months salary as savings - in case you find yourself jobless - and then transfer a portion to an on line savings account. On line accounts earn a lot more - up to 6% - than brick and mortar type passbook accounts. ING Direct is one good example.

Diversify by buying Cd's and bonds. Bonds and Cd's offer protection against the volatility of the stock market.

Before anyone wags a finger at me for shying away from stocks, remember that were talking about savings - you should only invest what you can afford to loose in stocks.

Play it conservatively, diversify, and be patient.

Answer 3

That's going to be a personal choice. 2 things to remember if you choose to go the 'compare the return on the money between the mortgage and an investment' route:

1. You have to adjust your mortgage interest to account for its tax-deduction. If you have a 6% mortgage and your marginal tax rate is 28%, that's actually a 4.32% mortgage when adjusted for taxes.

2. Paying the mortgage is a guaranteed return on the investment, so you can't directly compare the return to stock market returns.

I would probably first establish a good cash cushion in a savingas account or CD somewhere, then use whatever is left to pay down the mortgage. Then every month I would invest the money that I used to be paying on my mortgage.

Answer 4

It's a matter of comparing what rate you are paying on the mortgage to what rate you would earn otherwise on the money. Like casinos, banks stay in business by (usually) having a "house" advantage or margin above what they would pay you for like-risk investments. You would probably beat the rate you are paying on the mortgage ONLY at the cost of taking risk, such as in the stock market. If you know how to manage that risk well, what financial problems do you really have? If not apply some or all of the $100k to mortgage PRINCIPAL and so state it should be applied that way.

Answer 5

The choice is down to return of value

If your investing the money returns say 10 percent (i wish)
and your mortgage interest is 15 percent then you have a net loss of five percent. conclusion pay off mortgage
If the numbers are the other way round then then with a net gain then invest
You do also have to take into account any tax breaks.
there are some things to take into consideration, intangibles, A sudden expense that may occur if you use all of your savings towards paying off your mortgage then you may not have that buffer
Have your pay paid into an interest account buy everything on credit card but pay it off on time. That way you earn interest on the money borrowed.

Answer 6

- It depends on your own situation.
- Put a good amount of cash in CD account as Emergency fund. The current CD interest rate could be as high as 5.5%. If you have a mortgage interest rate lower than current CD rate. There is no point to pay extras to your mortgage. I will feel safe to have at least 20k as cash in bank, but it depends on how much you need as Emergency fund.
- Maximum your Tax Free investment.
- The rest of the money is all depends on how much risk you want to take. Mortgage and CD is a risk free return with its Interest rate. If you think you are going to find a good way of investment, and you are comfortable with it. You should put the money for investment. To do any investment, you may need to review and study on what you are investing. If you are lazy as me, I will put all money to the house.

Answer 7

The answer is rather simple and does not need a lot of words. If you make at least 6% by investing, you are better off using the money in the market place than paying off a home loan sooner. Money can help you make more money, so why not use it for that purpose?

Answer 8

are you planning on living in that house for a very long time? if so, yes, pay it off. it would be one less bill every month to worry about....especially as you get older. if on the other hand, you are planning on moving in 5 years then it really makes no sense to pay it off completely since you can get a better rate of return investing in other things (assuming your mortgage is ~6%)

ther are other things to consider; such as do you have an emergency fund (ie; 6 months living expense in case you get laid off), do you have any other investments (ie; a 401(k) - if not, open one up through your employer and start contributing to that immediately), how about a roth ira (again, if you dont have one, open one up).

Answer 9

Good answers, especially the emergency fund and investing the difference if you save on monthly mortgage costs( refi).

Three things to remember,
1. Make sure you create that emergency fund
2. max out your Roth IRA if eligible
3. Meet with your trusted mtg rep/banker withe the proceeds and see what they can offer(rate,term,payment)

Answer 10

There is not enough information to answer your question.

What is your current interest rate?
Is it fixed or variable?