10 months ago
97
Does it make sense to aggressively pay down your mortgage first? Or should you invest any extra cash?
When the question is whether you should pay off debt or invest, the standard advice is to compare the rate of return you could expect to earn if you invested the money in financial markets versus how much interest you would save by paying off the loan faster.
Don't miss
-
Car insurance premiums in America are through the roof — and only getting worse. But 5 minutes could have you paying as little as $29/month
-
Commercial real estate has beaten the stock market for 25 years — but only the super rich could buy in. Here's how even ordinary investors can become the landlord of Walmart, Whole Foods or Kroger
-
These 5 magic money moves will boost you up America's net worth ladder in 2024 — and you can complete each step within minutes. Here's how
But since this couple is planning to sell their home soon, there are more complex considerations for each approach to the conundrum here. There are some scenarios where investing the cash in liquid assets like a high-interest savings accounts would be beneficial.
When to save your extra cash
Say, for example, a married couple has $310,000 left on their 6.3% mortgage. But they’re planning to start a family and want to move into a larger house within the next three years. Should they pay off their house with the extra cash, invest the cash or save the cash?
If they’re planning to upgrade to a larger home, they’ll need extra cash on hand to cover the down payment, closing costs and moving expenses. Closing costs typically range from 2% to 6% of the loan amount, but it will depend on your lender and which state you live in. There’s also a cost to refinancing your mortgage, but it could be beneficial in the long term, resulting in a lower interest rate, smaller monthly payments or a shorter term on your mortgage — especially if mortgage rates drop.
The couple may be expecting to earn a profit on the sale of their current home, but they might not receive the money in time to cover the down payment and closing costs on their new home. While they can try to coordinate closings, they may need to take out a bridge loan to close the gap. Even if the timing works out, the couple may still need cash for other costs, such as repairs or renovations.
Their profit may also be smaller than they expect. Americans spend nearly $55,000 to sell their homes, according to a report from Clever Real Estate, in part due to hidden and unexpected costs.
That’s where having extra cash on hand could come in handy — and they won’t have to resort to credit cards or loans.
