Should I pay off my mortgage or use my liquid cash to invest?
I am wondering if I should use my liquid cash to pay off my mortgage, or would I be in a better position if I invested? I am currently $200,000 in debt at 4.05% and am in my 28th year of a 30 year mortgage.
You should pay off your mortgage and never think about it again.
Would you ever consider taking a second mortgage on your house to purchase stocks, bonds, and investments? Most people would say "no way." With this in mind, why would you carry a mortgage while owning stocks, bonds, and investments. It's the same phenominon.
If you continue to pay the loan off diligently for another 10 years and then decide to pay off the entire balance the real interest rate you would have been charged on the loan balance would equate more towards 6% per year because of the amortization schedule of a mortgage.
Pay it off. You will never regret it.
The key to your question here is to understand how Amortization works. For a fixed 30-year mortgage, your mortgage payment consists of both interest payment and principal payment every month. Even though the total monthly payment amount is the same, the portion of the interest and principal payment are different each month. In general, the portion of the interest payment is the largest in the first month and then keeps decreasing over time. On the other hand, the portion of your principal payment is the smallest in the first month and then keeps increasing over time. There are many amortization calculators like this online. You could simply put your information in and find out how much interest you are currently paying from the amortization schedule.
The point here is that since you are in the 28th year of a 30 year mortgage, the interest portion of your monthly payment should be really small. The majority part of your payment now is paying back your principle. In other words, you should use your actual interest payment rather than the 4.05% interest rate when you compare it to other investments.
It is very hard to give you a definite answer without knowing your overall financial situation like income, expenses, other investments, and debts, etc. Based on the limited information here, you are probably better off to keep paying the regular mortgage payment and invest the additional cash into a well-diversified portfolio based on your risk tolerance and investment objectives. In addition, even though paying off the mortgage may not make sense from the financial perspective, you may feel a lot better emotionally when you are finally free of debts. You should make your decision based on your specific situation. And don't forget to keep enough money in your emergency fund. Hope it helps.
There's a lot of missing information here, so I will fill in with some assumptions that I hope are to the point (but will at least be helpful to others who might be reading.
First of all, if there's $200,000 left after 28 years, then the mortgage must have been huge -- several million dollars, I'd guess -- and thus your payments are really high. To go from $200,000 to zero in two years and pay interest at the same time requires a monthly payment of about $9,000 per month. The interest alone is more like $670 per month. Thus if you paid off early you would be putting a lot of money into home equity that might better be used to earn a return instead.
Are you still working or are you retired? If the former, you can presumably afford the payments and retain the cash (and add to it?). If you have retired then I will assume you have enough to live on outside of the $200,000 you need to pay the bank in the next two years and might appreciate not having to write a big check every month -- so you'd choose to pay off the mortgage now. Also, if you are retired you are probably better off not taking investment risk on $200,000 for two years. Your investments could decline and you'd regret not retiring the mortgage early.
It really depends on your time frame for investing. If you have a longer time frame then it makes sense to invest the cash as a you can expect a long-term return of roughly 6% in a diversified portfolio with moderate risk. Paying down your mortgage will only save you a little bit of interest given how far you are in your amortization schedule.
You shouldn't have a tough time to earn more than 4.05% on your investments over the long term. Not to mention you get a nice tax deduction for interest paid on your mortgage.
I go more into what you could do with this post about a house down payment- not the exact same situation, but the same thought applies. After the tax deduction you will likely come out ahead investing the money- plus it gives you more flexibility if something breaks around the house etc.