In general it comes down to risk tolerance and most of the decision making is more based on emotions and psychology as opposed to what makes sense financially from a numbers perspective.
Here is my take:
If mortgage is 6% or higher, pay it down at expense of some liquidity
If mortgage is between 5 and 6% the decision leans towards paying off, but I want more liquidity.
If mortgage is under 5%, I would invest and maximize liquidity.
Details:
6% is tough to beat after taxes with moderate risk (20-80 type portfolio). Makes sense to pay down principal provided you have around 4-6 months expenses in an EF.
5.5% is possible to beat with a moderate risk portfolio (20-80 asset allocation). Once I had close to 12 months expenses in a liquid account (earning close to 5.5% after tax), I would review the decision to pay off or not. I want more liquidity than the 6% case (to protect in case of job loss or similar). I also want to be debt free sooner or later.
If mortgage is 4.75% or less, Most investors could beat that return, even with a 20-80 portfolio. 100% cash almost beats that return.
A second factor is the size of my pay down amount. If my pay down amount is significant (maybe the amount in question each year is 4-5 months worth of mortgage payments), then the larger the amount, the more likely for me I would pay down the debt. The smaller the amount, the more likely I would be to invest. This again is a liquidity issue.
__________________
Light travels faster than sound. That is why some people appear bright until you hear them speak.
One person's stupidity is another person's job security.
|