Paying your monthly mortgage at 5% interest can seem never-ending. Many people question if they should pay down their home loan.
As an example, let’s say you buy a house for $400,000 with a 20% ($80,000) down payment at 5% interest, payments of roughly $1,333 per month.
Later, you receive a $150,000 inheritance. Then there is the question of what to do with your newly acquired money. You have two options: 1) invest and diversify your assets, or 2) pay down your home loan.
If you decide to pay down your home loan, your new found inheritance money becomes unavailable. Earning back the money you put down on your home loan can be problematic. Do you sell or refinance your house?
If you refinance will you even qualify for another loan, and if you do qualify, what will refinancing cost?
While it may be tempting to take the money and pay down your home loan, in reality, by doing that you’re really creating an illiquid asset and narrowing your opportunity to increase your assets.
Instead of paying down your home loan, invest the money and create liquid assets. With the opportunity to diversify your assets, your risk is actually less.
Keep paying the 5% interest rate on your home loan while you’re making that and more off of your other investments, and increasing your net worth.
So when faced with this type of dilemma, remember:
- Liquidassets > Illiquid assets
- Diversification of assets> Non-Diversification of assets
Have a great weekend.
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