Extra Mortgage Payment vs. Investments

As my wife and I begin the process of finding and buying a home, we repeatedly find ourselves investigating various aspects of home ownership. Right now, we’re in a situation where we are able to save and invest far more each month than we will be spending on a home mortgage in the price range we’re looking at, which means that after we move, we’ll still have a few hundred extra per month (yes, even after figuring liberally for all sorts of home ownership costs) to either invest or to put towards paying off our mortgage faster. We have little interest in buying a home that will put us in debt up to our neck.

I found that this article at bankrate.com does a great job of spelling out the pros and cons (in general) of extra mortgage payments versus investments, but the conclusion leaves something to be desired. In short, they dodged the question by saying that they’re both good.

So my wife and I sat down, deconstructed that article (and several others), and came up with a brief questionnaire that can help you decide whether or not you should take extra money and invest it or put it towards your home mortgage. It’s a series of five yes-or-no questions, so let’s play along at home!

1. Are you a conservative investor (i.e., are you uncomfortable in the stock market and prefer to earn less and keep your principal safe)?
2. Are you planning on living in the home for longer than five years?
3. Do you not expect significant acceleration on your income?
4. Are you in a low tax bracket (25% or less)?
5. Are you within fifteen years of retirement?

The more “yes” answers you have, the better the case is for putting money into your mortgage rather than into an investment. In general, if you are a conservative investor, if your life is highly stable, and you’re approaching retirement, you’re better off paying off the house. On the other hand, if you’re young and looking at moving in the near future, invest the money.

For us, we made the decision to put more money into our mortgage. The big reason is that we’re conservative investors. We also plan on living in the same area for a long while and we want to start building our dream home when we’re in our forties at a point when we plan to have our house paid off (we’re going to likely get a 15 year mortgage and still make extra payments).