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Prepay or invest the money
Buying a home is one of the
best investments that an individual can make.
The national average for selling prices of homes have consistently
increased since the end of World War Two, and owning a home is a guarantee to
the homeowner that they have valuable collateral at their disposal. Despite the financial reassurance that
owning a home has, a homeowner does not truly own their home until they pay off
their mortgage.
Unless you are one of the lucky few that have the financial means to pay for a
home outright without a loan, than you will usually have to acquire financing
to pay for a home. Acquiring a home
loan will not be difficult if you have a strong credit history and are financially
secure enough to purchase a home.
However, mortgage loans tend to be relatively long-term agreements and
often span a course of 30 years. With a
mortgage loan, the homebuyer pays a monthly sum that is used to pay off the
principal amount that they have borrowed from their lender to purchase a home
and also the interest that is applied to the principal amount. Mortgage loans come in different varieties
that vary in terms of the length of the loan agreement, the level of interest
rates, the type of interest rate that can either be a fixed interest rate or an
adjusted interest rate that mirror fluctuations in the national interest rate
level, and the general terms of the mortgage agreement.
During the duration of the
mortgage lifespan, the homeowner will invariably find that they are in a
position where they have extra income that can be applied to paying off their
mortgage loan. However, in this
situation the homeowner can also apply this extra income in this investment. Under this scenario, the homeowner is faced
with an interesting proposition where they must decide whether or not it is in
their best interest to devote their extra finances to prepaying their mortgage
debt or rather if it would be more advantageous to invest their money.
The most comprehensive
analysis that will determine what is the best course of action for the
homeowner would come from a consultation with their financial advisor. However, there is an instrument that will
provide an informal estimate over whether investment or prepaying your mortgage
loan would be the best decision by providing an outline of the long-term fiscal
ramifications of both decisions. This
instrument is a prepay or invest the money calculator.
A prepay or invest the money calculator is an online tool that will assist you
make a quick decision over how to allocate extra income that you have come into
while you are in the midst of a mortgage loan.
There are excellent advantages to either use of your extra
finances. The benefits to prepaying
your mortgage loan are that you will be able to pay off your mortgage sooner
than you expected. By paying off your
mortgage loan before the end of your mortgage loan contract, you will be able
to save money by paying less in interest.
As interest relates to the remaining principal that is left on your mortgage
loan, prepaying your mortgage loan will lead to fiscal savings. However, by prepaying your mortgage, you
will also lose a portion of your mortgage-interest tax break.
There are a number of pros
and cons that are associated with the fiscal strategy of investing. Although investing is a proven method to
making extra income from an initial investment, there are a number of
risks. Investing is a two-way street
where you are able to make a large amount of money that can be considerably
larger than what you would save by prepaying your mortgage loan but at the same
time you could also lose your investment.
Essentially, the higher your assumed return in an investment is, the
more volatile your investment is.
Whereas prepaying your loan provides a guaranteed financial return,
investment carries a number of risks.
This risk should be considered when determining what your next fiscal
course of action is.
With a prepay or invest the
money calculator, you will have access to a thorough instrument that will
provide a relatively detailed analysis of your financial components. The prepay or invest the money calculator
factor in such variables as:
How much more you want to spend each month: this is the extra amount of income that you
are able to use each month for either prepaying your mortgage loan or
investment.
Current monthly payment: this refers to the amount of money that you
use to pay down your mortgage’s principal and interest expenditures.
Current annual mortgage interest rate: this is the annual interest rate that is
assigned by your loan source to your mortgage loan, which is how a loan
source makes money from their investment in you. This function allows homeowners that are on an adjusted
mortgage plan or who are on a fixed mortgage plan use this calculator to
deduce which is the best course of action for their extra income.
Current mortgage balance: this refers to the amount of money that
remains on the homeowner’s principal mortgage amount. This function allows homeowners to
decide how they should use their extra income regardless of how long they
have been on their mortgage loan plan.
Expected long term investment return (%): this refers to your expected investment
strategy, where a number of strategies are listed that should roughly
correspond with your financial strategy.
This provides a rough analysis of how investments can vary and the
options provided in the expected long term investment return are:
Under mattress (0.0%): an investment strategy in which it is assumed
that you will save your extra income without investing it in a strategy
that will produce some kind of return.
This is the safest option in saving your extra income but does not
yield any financial return.
Checking account (2.0%): one of the safest financial options, this
investment strategy assumes that you will save your extra income within a
checking bank account that produces a minimal financial return but has
very little risks.
Money market (4.5%): this refers to investments that are made in
the capital market that deals with short-term debt instruments such as
negotiable certificates of deposit, treasury bills, commercial paper, and
banker’s acceptances. It is a
relatively safe investment that produces a higher fiscal return than checking
account.
CD’s (6.0%): a safe investment vehicle, certificates of deposits (CD’s) are
offered by banks and brokerage firms.
CDs produce a higher return than money market investments, but you
are unable to retrieve your investment until the terms of the CD’s are
completed.
Conservative stocks (7.5%): this refers to stocks that are considered
safe. Although they do not
produce a high fiscal return compared to other stock investments,
conservative stocks are ideal for investors whose biggest priority is
preserving their capital.
Risky stocks (9.0%): this refers to stocks that are riskier than
conservative stocks. Risky stocks
will provide a higher financial return for investors but they also
contain a higher chance of loss.
High roller (12.0%): this refers to risky investment choices that
produce considerable financial returns when they are successful, although
there are also substantial odds against the success of a high roller.
Real estate (15.0%): a long-term financial investment, real estate
produces a considerable return on your initial investment. However, this return will not be seen
in the short-term so is only an option for a small percentage of
homeowners.
Illegal activities (22.0%): the saying crime pays is a cliche
because it’s a truism. However,
despite the substantial financial return that you can attain through some
illegal activities, there is the larger downside of being arrested.
Expected Long Term Tax Rate (%): this figure is comprised of both the federal
and state tax rates that will be used to determine how both investment and
prepaying your loan will affect how much you will theoretically be taxed.
Investment type: you have two options under this category –
after-tax and tax deferred.
Through the use of a prepay
or invest the money calculator, Elaine McIllwraith, a Spanish teacher in
Tennessee was able to make a decision about how to use her extra finances. With a current monthly payment of $700 a
month at an annual mortgage interest rate of 7%, Elaine wanted to know how she
should use the extra $150 a month that she received from tutoring. With a remaining mortgage balance of $60,000
and an expected long term tax rate of 34%, Elaine wanted to see how an after
tax investment in conservative stocks will compare in terms of savings to
prepaying her loan. With the simple use
of a prepay or invest the money calculator, Elaine was able to discover that
investment was the best solution as it produced an extra $290.73 in fiscal
savings.
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