Is paying down my mortgage a good “investment”?[ Edited ]
I am living comfortably on my retirement income and have no debt (except for mortgage). I recently sold an investment property and will net approximately $30K which is not taxable. This was my only investment and now I would like to either 1) put this money towards the principle of my residence and recalculate the loan to save on my monthly mortgage or 2) invest some other less labor intensive manner. My goal would be to make a little bit of money, but in a safe and secure manner which is why I am thinking of putting this money towards my residence. What would you suggest?
Congratulations on both being able to live comfortably on your retirement income and on having an extra $30k to work with! I know a lot of retirees who wish they could say that.
But to your question, is paying down your mortgage the best use of this extra cash?
Honestly, it depends. I’d need some more information about your situation before I could say for sure one way or the other. Even so, I am comfortable saying that it’s probably not a terrible idea. Here are a few things to think about to help you decide:
Interest rate comparison – One point to consider is the after-tax interest rate you’re paying on your mortgage compared to the after-tax return you might expect to earn by investing the money instead. If you don’t think you could earn more, then paying down the mortgage might give you a better “return” on your money. To be clear, for this to even be a valid comparison, you’d have to be comfortable investing the money as one of your possible courses of action. If you wouldn’t be comfortable investing it, then this probably isn’t much of a consideration. Also, it’s worth noting that there’s no guarantee you’d be able to earn more by investing. Some people are willing to take that calculated risk though. The real question here is: Would you be?
Cash flow needs – Another consideration is your need for cash flow. I realize that you’re living comfortably on your retirement income so this might not be much of an issue for you. Even so, it’s something to think about from a couple different angles. First, might you need this cash for something else? If you use it to pay down your mortgage, you essentially lose access to it. Second, how much benefit would it provide you to have a lower mortgage payment? If it’s not a lot, maybe keeping the cash more liquid would be a better idea.
Costs – Even if you pay a big chunk down on your mortgage, if you want to lower the payment you’ll likely need to refinance the loan. And that usually comes with some costs. So before you commit to that course of action, you’ll want to talk to your lender to see just how this would work for you.
While these aren’t the only things to think about in making this decision, they hopefully give you a good start. Ultimately, I’d encourage you to view this money in the context of your total financial picture rather than just locking in on your mortgage. It’s possible the mortgage is the best target but it’s also possible that it could be better used elsewhere.
Thanks so much for your question and best of luck to you!