Future retirees have an important financial decision to make today that could lay the groundwork for eventual financial security in retirement, especially knowing most homeowners' mortgage is their single largestdebt throughout their lifetimes.
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With this in mind, Motley Fool analysts Gaby Lapera and Nathan Hamilton discuss in the video below the financial tension between investing your savings in the market versus paying off mortgage debt faster.
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Gaby Lapera: Should I use savings to pay down my mortgage or invest in the market?
Nathan Hamilton: That's a good question. I'll say this. We'll go into some of the details, but of course, it does depend upon your personal situation. Just looking at it from a very numbers-y, financial perspective of, "OK. Should I pay down more on my mortgage, versus investing?"
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If you look at mortgage rates right now, they're around 4%. Let's assume that people are paying out 4% of interest on their mortgage. The long term rate of return, very long-term rate of return on the market is around 8%.
In those scenarios, it would suggest saying, "OK, invest in the stock market instead, because I can earn that extra 4% approximately amount of return." Here's the thing to also put in context where maybe the financials don't necessarily guide what to do.
We, at The Motley Fool look at it saying, "OK. Whatever you can do to save, and invest, and pay down debt faster is going to improve your chances of reaching your financial goals." So, if I pay down my mortgage faster, and that's my goal over the next five years, and that frees me up to invest more later, or gets me to going on more travel vacations sooner, there are those instances where maybe it doesn't make financial sense. The 8% return versus paying 4% interest, they don't jive with each other, but there are scenarios where that could make sense for people and their financial goals.
Lapera: Yeah. One thing to keep in mind, because tax season is here, is ...
Hamilton: Such a fun season.
Lapera: ... such a fun season. Is that if you itemize your deductions, you can itemize a pretty hefty portion for ...
Hamilton: For mortgage interest.
Lapera: ... for your mortgage interest. Keep that in mind if that's a factor when you're trying to decide whether or not to invest is how it might affect your taxes. It's this horrible, complicated ecosystem, finance is.
Hamilton: Yeah, and it's so easy to overlook taxes. Looking long-term investing, again, people that are most successful investing in indices, or the S&P 500 are ones that are doing so in a tax-efficient way. Once again, it's a very small thing that over the long-term compounds those returns and makes a huge difference. It seems meaningless in the near term, but it definitely does have a very big impact.
Lapera: That's true. Just for anyone who's listening and is curious, I know we're talking about mortgages, but the long-term capital gains tax kicks in over the short-term capital gains tax where you pay a lot more after holding for a year and a day.
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