The Safest Investment You Can Make

With many companies suffering huge losses that show few signs of letting up anytime soon, scared investors have fled to the safest investments they can find. Yet instead of taking historically low rates on Treasuries and bank savings products, you might find better returns from an unexpected source -- paying down your home.

Most of the time, people think of their mortgage as a bill they have to pay each month, rather than as an investment. But as you'll discover in this month's issue of the Fool's Rule Your Retirement newsletter, your mortgage also gives you an opportunity to lock in a fixed rate of return when you make payments above and beyond what you already owe each month.

A lesson in opportunity cost
The idea behind treating your mortgage as an investment is pretty simple. Taking out a loan is essentially the opposite of investing your savings; instead of putting up your money to buy an asset that earns a rate of return, your bank puts up its money to loan to you in exchange for your monthly payments.

Now, whenever you save money, you have a choice. Obviously, you can buy stocks, bonds, mutual funds, or other investments. But if you decide to pay down your mortgage instead, you not only reduce the amount you owe -- you also cut down on the amount of interest you'll pay throughout the remaining years of your loan.

To many who are particularly spooked by the mortgage crisis, getting out of debt sounds like a good strategy. But is it the best one?

Why you might not want to
In this month's issue, Fool expert Robert Brokamp gives you plenty of good reasons why paying down your mortgage is smart. But there are also some good reasons not to. Here are a few:

Better investments elsewhere
When stocks are high and potential returns are limited, taking advantage of paying down a mortgage makes the most sense. Unfortunately, most investors think about safe investments only after the market has already fallen. Ask yourself: When would you rather have invested in these commonly held stocks, a year ago or right now?

Stock

1-Year Return

Comcast (Nasdaq: CMCSA  )

(10.7%)

Home Depot (NYSE: HD  )

(14.2%)

IBM (NYSE: IBM  )

(24.7%)

Johnson & Johnson (NYSE: JNJ  )

(11.5%)

Microsoft (Nasdaq: MSFT  )

(41.4%)

Pfizer (NYSE: PFE  )

(27.7%)

ExxonMobil (NYSE: XOM  )

(14.6%)

Source: Yahoo! Finance.

But with stocks so much cheaper now, the surer bet of paying down a mortgage is much less attractive -- and the opportunities from stocks are more promising than they were a year ago.

You need the liquidity
Paying down your mortgage builds home equity. But with credit still tight, you might have trouble accessing that equity through a home equity loan or line of credit. So if you think you'll need cash in the next few years, you might be better off saving that money -- even if it pays you a lower rate than you're paying on your mortgage.

You're way underwater
This one goes against the normal Foolish principles of managing your debt. But if the value of your home has fallen well below your outstanding loan balance, you want to be absolutely sure you're committed to sticking it out before putting more money into your home. If you pay down your mortgage but end up in foreclosure anyway, you might end up with less outside cash than if you had never paid your mortgage down -- depending on local laws.

As you can see, the decision to pay down your mortgage isn't always an easy one. But for help in getting through the complicated math, you can't beat Brokamp's analysis -- he goes through interest costs, tax benefits, and a number of other secondary effects you might not have considered. And even though Rule Your Retirement is a paid service, you can see Brokamp's analysis -- along with the rest of this month's newsletter, back issues, and other useful resources -- free with a 30-day trial.

In the end, the good feeling that comes from being closer to debt-free may be enough to push you toward paying down your mortgage. Just make sure you've thought about all your alternatives before you decide.

More on making the most of your investments:

Fool contributor Dan Caplinger plays it safer than some, but he's not paying down his mortgage right now. He doesn't own shares of the companies mentioned in this article. Pfizer and Johnson & Johnson are Motley Fool Income Investor picks. Pfizer, Microsoft, and The Home Depot are Motley Fool Inside Value picks. The Fool owns shares of Pfizer. Our Foolish disclosure policy keeps you safe.


Read/Post Comments (1) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 12, 2008, at 2:54 PM, mmarler3 wrote:

    It seems to me that paying down your mortgage is always wise, especially until the interest included in your monthly payment becomes less than the principle amount. I paid my 20-year mortgage off in ten years, saving thousands of dollars in interest costs. That was 20 years ago, and when I sold my house last year, just as the market was starting to get soft, what I got for that house was truly gratifying. My original $33,000 investment turned into nearly three quarters of a million!

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 789952, ~/Articles/ArticleHandler.aspx, 9/17/2014 2:03:36 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement