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Business // Thinking Smart
David S. Chang

Should You Invest Or Pay Off Debt?

If you have some extra cash available, should you try to pay down some debt like a mortgage or should you invest it? There are some who would want to pay down their mortgage as quickly as possible. But it’s important to look at the potential return on that cash.

The answer as to whether to invest it or pay down the mortgage is not so simple. Here are some tips that will help you decide what you should do!

When You Should Pay Your Mortgage

* One thing you can’t put a price on is peace of mind. Regardless of what you think your return can be if you invest it, if owning your home free and clear gives you peace of mind that you need, then it makes sense to pay it down. Some people like the idea of not having a monthly payment to make, especially in retirement. Paying off your mortgage quicker also can free up more money for expenses and save you money in the long run.

* If you have a variable mortgage rate and you believe the rate will go up in the future, then it may make sense to pay it down.

* Some people prefer to leave their money in cash or in a bank CD. If the money isn’t doing anything and you are reluctant to invest in the market, then paying down the mortgage makes sense. Always remember to leave an emergency fund! Visit artofthinkingsmart.com to find how much you should save.

When You Should Invest

* The average 30-year fixed mortgage rate in Hawaii is currently 4 percent. (Average 15-year fixed is 3 percent) If you are years away from retirement and feel comfortable investing in the stock market, it may make sense to invest it. The average rate in the stock market the past 30 years has been 8.7 percent, and if you reinvested the dividends it would be 11.2 percent. You would come out ahead investing instead of paying down your mortgage. If this money is in a qualified retirement account (IRA, 401(k), 403(b), etc.) then you would come out ahead with even more in the long run. We currently have historically low interest rates of sub-4 percent mortgages. Once they start going up, we may not see them go down again, so it may make sense to invest any extra money and keep the difference.

* If you itemize your taxes and can take the full benefit of the mortgage interest deduction, then it also may make sense to invest it. The closer you are to paying down your mortgage, however, the less interest you are paying and subsequently get a smaller benefit. You only get to deduct the interest portion of your mortgage payment. Keep in mind, though, that if you take the standard deduction of $12,400 instead of itemizing, then you will not get any benefit from the interest deduction. Talk to a tax or financial professional to better understand the impact of taxes in your decision and the advantages and disadvantages of each scenario.

david@artofthinkingsmart.com

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