One of the regular debates here on Money360 is the eternal question of whether someone should prepay on their home loan or not. Any time you discuss a particular home mortgage situation with real numbers, someone will always say that it makes more sense to invest it somewhere else, while another person will pipe up by shouting that debt is bad and that you should get rid of the debt.
Indeed, the issue of prepaying on your home loan is a complicated one, because both people above are right. Most likely, there are investments that can put more money in your pocket in the long run if the investment goes well and your circumstances don’t change. On the other hand, getting rid of debt is always a good idea unless your income continues to grow and the interest rate on the loan is low.
What’s the difference between these two scenarios? Risk. Choosing not to prepay and instead invest the money in other, potentially more lucrative options is a relatively risky proposition – you keep a debt load on yourself and you’re putting your money in places where past performance is no indication of future results. On the other hand, you can calculate down to the penny your return on investment when prepaying your home mortgage – but that return is often not stellar.
Among the personal finance gurus, there’s not a consensus, either. Robert Kiyosaki is a huge proponent of leveraging your investments, meaning that he’d likely almost always be in favor of investing that extra money. On the other hand, Dave Ramsey strongly advocates being debt free as soon as possible, so he’d almost always encourage you to get that home loan paid off as soon as possible.
In the end, the correct decision is not one that can ever be determined by running numbers over and over. No set of numbers will ever accurately predict what will happen in the future. Perhaps you will see a bump in salary, or maybe you’ll be tempted to take a lower-paying job that’s a deeply fulfilling opportunity. Perhaps the stock market will boom and you’ll be in excellent shape – or maybe a bubble will burst and almost everything you invested will vanish, leaving you only with your mortgage debt.
If you have extra money and you’re considering what to invest it in, look at the numbers, but also don’t forget to look at your heart. If the risks inherent with investing your money elsewhere makes you uncomfortable, go the conservative route and just prepay your mortgage. On the other hand, if you’ll constantly regret not chasing the possibility of big earnings, then you should be investing that extra money.
There is no right answer for everyone, because a vital part of the equation is how you feel about risk and debt.