Extra $500: Invest or Pay Off Mortgage?

Added October 17, 2008 by Ilyce R. Glink

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Summary: This homeowner has an extra $500 a month and can't decide if he should pay down his mortgage or invest in the stock market. What's the better investment for his $500? Some investment advisors tell people nearing retirement to put money in a safer investment, but the stock market could also bring greater returns.

Q: My wife and I enjoy listening to your radio show on Sundays. We are both 65 and I work full time and my wife works part-time. We'd like to sell our house because it is too big for us now but we know this is not a good time so we are waiting for the market to improve. In the meantime we're paying an extra $500 a month on our loan. We have balance of $155,000 and house was appraised at $240,000 in March of this year.

Our current income is little over $200,000 per year and we are well set for retirement even considering the hit our retirement 403(b) and 457 accounts have taken lately. Would we be better off to invest the $500 per month in something other than equity in our house considering the condition of the housing market?

Thanks in advance for your thoughts.

A: The nice thing about being financial stable in a tough market is that it gives you the opportunity to do a little stretching when it comes to your investments.

As long as your interest rate is low on your mortgage (and if not, check out interest rates because while they're historically low, they may get even lower before the year is out), you might as well keep your loan and invest the extra $500 elsewhere.

I would suggest that you open up a brokerage account and add your $500/month to a super-low cost index fund of some sort. I do believe that now could be an excellent time to buy index mutual funds and hold them long-term, especially since you're not risking cash that you actually need to live.

You should know, however, that some investment advisors are cautioning people that are close to retirement to keep their money in a safe investment that will not fluctuate with the market.

October 17, 2008

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