Should I keep money in cash or pay down my mortgage?

Posted by  on Feb 27, 2013

Q: I have $20,000 in cash and am trying to decide whether I should pay down my $165K mortgage balance or invest the money instead. My retirement savings are in good shape and I have no debt other than the mortgage. Any advice?

A: All things being equal, you'd probably be better off paying down the mortgage than leaving the money sitting in cash, because as low as today's mortgage rates may be, deposit rates are even lower.

Still, financial decisions are never quite that cut-and-dried, so here are some other factors to consider:

  • How much equity do you have in your home? If you have little or no equity in your home, making a lump sum payment can help you build an equity cushion. This can give you more flexibility if you want to sell or refinance your house in the future.
  • Do you have any long-term investments? You mention your retirement savings are in good shape, so you probably have some long-term investments; but if not, that might be an alternative use for this $20,000. Having a portion of your savings in stocks can help provide growth to offset inflation.
  • What is your mortgage rate now? The more you are paying above current mortgage rates, the more it argues for putting the money into your mortgage. If you still have a higher rate, what you'd need to earn to do better by investing is even higher, and paying down the mortgage could help give you the flexibility to refinance.
  • How are you set for emergency cash? Unless you already have about six months' worth of essential expenses set aside in cash, it may be wise to keep at least a portion of the $20,000 liquid.

As you can see, there are a few things to think about before you make a final decision. Still, whatever you decide, you can count yourself fortunate -- having a substantial chunk of extra cash is a rare problem to have these days.

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