What Are Other Better Investment Options Than Prepaying a Home Loan?

We all desire to be homeowners. One recent study established that the main reason why Americansborrow is to buy homes. A home is a basic need and it is just good that you plan for it. However, there are many factors for consideration when deciding to take a mortgage. Your ability to deposit and make monthly repayments is very important. There are so many mortgage lenders out there with different rates and terms.
It is important to shop around for the best deal. You don’t have to go for whatever you are offered. By the way, your initial deposit determines the interest you will be charged on a mortgage. If you make a 40% deposit, you will have a lower rate than when you make a 10% deposit. Knowing this should save you a lot of time in decision making. What if the decision has already been made? Well, a mortgage takes time to be paid off completely. In some cases, moneylenders like A1 Credit extend the repayment period beyond 30 years.
While this appears to be a good deal, you will be required to make monthly payments which include the interest on the mortgage. The interest paid across the mortgage life can be too much and as a result, individuals often decide to prepay the mortgage.
Choosing this option has worked for some people. But is it the best decision you can make? In this discussion, we are going to weight the two options, whether to prepay the mortgage or follow the schedule made with the lender. Our question of interest is-What Are Other Better InvestmentOptions than Prepaying the Home Loan? Let’s see.

Various Investment Options

How do you decide? It is quite simple. Just make a comparison between the net interest on the mortgage and the net post-tax earnings from the investment. In case there are more returns than the net interest on the mortgage, it will be a good decision investing the funds. But if the returns are less than the net interest on the loan, make a prepayment or look for another investment option. If you decide to invest, the following are some of the options you may consider taking.

Debt Mutual Funds

This is an ideal option because you really need steady returns. There are not as volatile as equity funds, which means they are less risky. The investment here is on fixed interest-earning securities such as corporate bonds, securities offered by the government, and treasury bills among others. The market returns range between 6.5 and 8%.

Bank Fixed Deposit

These are accounts that run for fixed periods and earn attractive interests. These options provide you with a long run savings opportunity. Your savings can grow substantially.

Public Provident Funds (PPF)

This a fantastic investment option an individual often turns to. The investment period is always 15years with significant tax-free interest, more so in the final years. It is also a safe investment because of the sovereign guarantee.

Real estate

Do you consider the home you live in as an investment? That is fallacious reasoning because it is a self-consumption. Buy a second property and that will be an investment. If you invest in real estate, you will get two different returns, one is the capital appreciation and the other one rental. Nevertheless, real estate investments are highly liquid and getting regulatory approvals can be very challenging.

Gold

You can also possess gold as an investment. The price of gold keeps on appreciating and this means you are likely to earn significantly after a while. Nevertheless, there are several concerns, such as security and very high cost.

Equity Mutual Funds

You can also invest in equity stocks. These investments can be managed either passively or actively. On the active basis, the returns significantly depend on the ability of the manager to generate earnings. Passive management of funds is based on an underlying index.

Why People Choose to Prepay the Loan

Individuals prefer to prepay mortgages to save money spent on interest payment. The prepayment decision is so hard and should never be rushed to. As a borrower, there are some basic factors for consideration, including tax deductions. Remembering the fact that information is an overdose, financial literacy is a very important thing in this regard. When deciding to prepay a mortgage, you must be very pragmatic and logical in your approach. Let us briefly discuss the important factors you should consider.

The investment types

This is important if you have already ruled out the option to prepay the loan. The most important factor for consideration is the return on investment (ROI). If the ROI is not guaranteed or it’s just too low, consider other options.

Your mental attitude is very important

Do you think you will be happy being debt-free? Will returns on investments make you happy? Mental set-up is very important in making decisions

Consider your liquidity position

You may be asset-rich but cash-poor. If this is your situation, then it is wiser to invest than to prepay the mortgage.

What is your level of preparedness financially?

Are there things or plans that will require a lot of funds shortly? For instance, if your child will be joining college soon, it will be wiser to invest than to prepay the mortgage.

Your job security is an important fact for consideration here

Your current job helps to make repayments and support yourself. What if you lose your job today? Will you still afford the EMI’s? Do you have alternative sources of income? Do you have enough savings to keep you going? If your answer to these questions is no, it will be wise to invest the funds rather than prepaying the loan. You have to examine your short term or long term needs financial needs before making a decision.

The decision on whether to invest or prepay a mortgage is very critical and should be taken seriously. You think of making this decision because you have some funds. There are different approaches to this matter. If you feel the cost of the mortgage is high, you can prepay, save the interest amount and invest.

If the investments will earn you a lot more than what you are likely to save on interest, then invest the funds you have. You can use the returns to pay off the mortgage. What are the investment options you have? We have discussed at least six options. Which one do you think is best for you? Let us get your response. Thank you!

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