Thursday, January 29, 2009

Should We Invest or Pay Down Mortgage

At the beginning of the year my wife and I worked out a plan for our finances for 2009. We worked up a budget and made decisions about paying down debt, saving and investing. Most of the decisions were fairly easy such as deciding to aggressively pay down my car loan so that we are car loan free shortly into 2009. We also made decisions about how much to save for certain areas of future spending such as gifts, travel, car insurance, car repairs and home repairs. But one decision was not so easy for us to make. We had a dilemma to decide on.

Once we were done paying off my car we had to decide what to do with our extra cash flow each month. At this point our only debt left would be student loans at a really low interest rate and our mortgage. We also have a sizable emergency fund saved up in a money market account and cds. So our decision was between aggressively paying down our mortgage or beginning to invest more aggressively in mutual funds.

The risk with paying down our mortgage is that this money that we could have been investing will not be available to us in the future if we ever needed it. However, by aggressively paying down our mortgage we would be able to cut off about 18 years off our mortgage and save tens of thousands of dollars in interest.

The risk with investing all our extra cash flow is that money could be loss. With the drops in the market over the past year who is to say it can't keep dropping. Sure history is on our side and the market should rebound at some point. However we don't know when this rebound may occur therefore there is a risk for losing our investments. But it is highly unlikely that we will end up losing all of our money this way. The reward for investing could be a better return then we would recieve by paying down our mortgage. Also, this money will be available if ever needed in the future.

We made the decision to invest. We are willing to risk a loss for the possibility of a greater gain. We also want the added security that having this money in an investment account will give us. In our individual situation this is the best decision. There is the possibility that my wife will not be able to work in the future due to health reasons. If this were to occur we will feel more comfortable knowing we have this extra money saved up in case it is needed.

This decision would be different for every individual person. You must look at your own circumstances before making your decision. I am a believer in paying down debt. However with our own circumstances and the risk of losing an income in the future, it feels safest to me to invest this money. I believe that in personal finance there should be an emphasis on personal. Every individual must look at thier own situation before making decisions regarding thier own finances.


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Anonymous said...

Thanks alot for the great post!

Bloomberg reports that Victor Stern, a North Carolina home owner, saw his credit score drop 121 points after he got bank approval for a mortgage modification