One of the hottest topics of debate in personal finance management is – whether to pay off your mortgage or make long term investments with your spare cash? It is a very complex question and the answer is not simple and depends on a large number of factors. The following article would provide an overview of the options as well as their advantages and disadvantages so that you may decide your financial option as per your convenience.

Advantages of pre-paying the mortgage:

• One of the brightest sides of paying off your mortgage early is your mental peace. For majority of people, the sense of financial security is priceless and it relieves them from their daily financial stress. You also get released from your financial obligation.
• Also, paying off early provides a guaranteed return as you end up saving the huge amount of interest you would have paid throughout the long years of the amortization schedule. The rate of interest in investments (say, investments in stock market) may be much higher but, they cannot assure you a guaranteed return as some financial risks are always associated with such investments.
• Another important aspect of paying off mortgage early is based on sheer human behavior. You might decide to pay the monthly mortgage payment and make regular investments with the spare money. But, you may totally neglect and forget the investment part. You may keep it pending for many months as well as years. Hence, paying off early mortgage provides a secure investment and safe return.

Disadvantages of pre-paying mortgage and hence, advantages of investments:

• One of the down sides of paying off mortgage early is – generally, the mortgage interest rate is quite low and also, the interest payments on a mortgage are mostly tax deductible. Hence, you might lose the chance of making more profit with higher rates of interest as well as higher investment returns. For example, making a sound profit of 8-10% interest rate in investments is a much better choice than paying off a 5% mortgage loan.
• Another important factor is the gradual inflation. In the long run, due to the decrease in the currency value, the present monthly mortgage payment would effectively cost much less than today and that amount of money would not be worth as much the real ‘buying power’ any more.
• Also, pre-payment does not earn you any favors from the bank and thus, affects your financial liquidity. In case of financial emergency, you must need sufficient financial cushion to fall back. Investments would provide you the cushion. For a better financial stability, it is always advised to spread out the money.

Hence, paying off early or investing – the decision is completely on the borrower. But, he/she must attend certain factors before choosing any of them. The factors are – rate of mortgage interest, rate of investment returns, sufficient emergency fund, funds in retirement savings and tax- advantage funds and his/her financial stability.

The Real Estate Market has always been able to lure investors due to the high returns that buying and selling of properties can generate. Even the Global Economic Meltdown did not have any adverse affect on this industry. The demand for both commercial and residential properties is still very high. Thus, the financial institutions regularly offer loans for purchasing homes or commercial buildings and so people with good credit history can easily borrow money for the purpose of buying properties.

What is Property Finance?

It is a broad term that describes financial activities (mainly lending and borrowing) that takes place in the real estate market. For any developed or developing country, it is an important wing of the economy as it provides funds for rapid urbanization activities like building houses, constructing commercial complexes, infrastructure development etc.

In the residential sector:

Finance for residential properties is provided by many lenders like banks, financial institutions, mortgage companies, private lenders etc. The criteria for lending remains the same and detailed credit history checks of the borrowers are conducted before the loans are sanctioned or approved. Home loan providers accept joint loan application; if a person alone does not qualify to get the loan, then he can jointly apply for it with another family member.

In this case, the loan providers will do a background check on both the applicants and their combined source of income should be enough to pay the Easy Monthly Installments. Initially a security amount is needed to be deposited before the money is approved. Also financial documents should be provided for scrutiny; the lending rates are not so high in this sector.

Property Finance in the commercial sector:

Lending money for commercial properties is mainly done by nationalized banks, big financial institutions and a very few private investors. Given the fact that commercial lands or buildings are expensive, there is a huge risk factor involved in lending money for such properties. Thus, these kind of loans often require a guarantee in the form of a collateral security or a guarantor; in many countries the government acts as the guarantor to assist companies in getting the required capital.

The business sector provides job opportunities for many people and so the government of most countries helps this sector by acting as a guarantor for them in order to get property loans from the financial institutions. However, such help is only provided after doing a risk analysis on the project for which the money is needed.

For example, if a company approaches the government for monetary help in order to set up a new office in a city, the government will first analyze the risk factors involved with this project, the benefits that people can derive from it and its overall feasibility.