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Best Use of Your Money: Invest or Pay Off Mortgage?

written by: Olivia Emisar•edited by: Michele McDonough•updated: 8/10/2011

What type of investments are we talking about? The volatility of the markets does not inspire much confidence in Wall Street and European financial troubles are compounding the state of our stagnant economy. Best advice: Invest in yourself.

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    Reasons Not To Buy Stocks

    Let's be dispassionate for a few minutes and try to divorce ourselves emotionally from our hard-earned money and consider the following situation.

    Wall Street was bailed out with billions of tax payer's dollars to avoid a collapse of the global economy at the end of President Bush's administration.

    The remaining half of the bailout money was left in the hands of the incoming administration and President Obama obliged based on the fact that global economies were too intertwined with our own. It was stated that an economic downturn worse than The Great Depression would ensue if nothing was done to rescue the banking institutions that had played a dangerous game of financial irresponsibility. They were, in fact, "too big to fail."

    Since the banks and corporations received the bailout, they have been sitting on the money without investing it in stock, infrastructure, consumer loans or anything that makes the economy sing and stocks rise. If the "experts" in the field are unwilling to invest money that is not theirs to begin with, does it inspire confidence in stock investment in the average person? Most likely, this is a resounding "no" and we are back to feeling emotionally attached to hard-earned savings we are not willing to gamble away on shady financial games.

    Consider the following economic news: On Friday August 5, 2011, the S&P downgraded the credit worthiness of the United States for the first time in the history of the country.

    The downgrade occurred for the following reasons:

    1) The political unwillingness of the parties to work on restoring the American economy and having a cogent plan that puts unemployed Americans to work.

    2) The ugly hostage situation and games played with raising the debt-ceiling for political gain sent shivers of uncertainty into the financial community.

    3) S&P stated that they did not feel enough was done to assure the credit worthiness of the United States.

    For those who live, breathe and sleep all that is Wall Street, there may be a few stocks worth purchasing and holding on to for the next few years, but for the average American with cash in the bank, the prospect of taking a huge loss in this volatile and uncertain global market, is not appealing. If the big players are not investing, why should you?

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    Invest in You First

    For those who have liquid assets sitting in bank accounts and are wondering what to do with it, consider finding the highest yield savings account and keep the bulk of the money there until the markets become more stable. For those who enjoy the gambling nature of Wall Street, consider investing in companies the United States government is willing to back up financially. Most of these will be involved in improving infrastructure and developing clean energy.

    If your tolerance for risk is very low, consider investing in peace of mind and splitting the money into three separate piles. Pay off the principal on the mortgage with one third, pay off high interest credit cards and put the monthly payments that would have gone to the credit cards towards reducing the principal on the mortgage.

    Put the remaining one third in a savings account or increase contributions to ROTH accounts. This is the most reasonable solution in this economy for those whose tolerance for risk is low and are apprehensive about the size of their retirement income.

    For those who can't find anything that gives them a high-yield return on their investment, consider paying off the mortgage a priority. If the current interest rate is 5 percent and you pay it off, that is a much better earnings than a savings account or uncertain profits from preferred stocks.

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    The Good, The Bad and The Ugly

    Mortgage Paying off the mortgage can bring peace of mind to people concerned with not having a roof over their heads in the future and are fully aware that their homes are not appreciating as in decades past. In fact, most mortgages are "upside-down", meaning that the mortgages on the homes are higher than their current real estate value. This is the ugly part.

    Interest rates are at historical lows and trading a 7 percent interest rate mortgage for a 4 percent mortgage will yield a savings worth thousands of dollars instantly. However, unless the bank sees unrealistically high FICO scores and credit numbers, they are not willing to make these loans available to consumers. This is the bad part.

    Homeowners with a credit score of 500 and above who are current on their payments may be able to qualify for a signifcant mortgage reduction on the principal. In 2011, more banks are participating in the program and have extended the program through 2013. One of them is Wells Fargo and more are being added to the HUD list of participating institutions. This is the good part.

    Before paying more than anyone should for a mortgage that is "upside down" a homeowner should avail himself of reduced interest rates, loan reduction plans available through the federal government and assess that these reductions will not impact negatively on their credit score. After all, the economy will rebound and everyone wants those credit scores to be as high as possible to take advantage of future investment opportunities that will require borrowing power.


  • Wells Fargo:
  • The White House:
  • Images: Mortgage by jscreationzs /
  • Bank Of America:
  • Images: Mortgage by jscreationzs / / Global Market by digitalart /