Should I Invest or Pay Off My Mortgage?

Sometimes it can be hard to decide whether to pay off your mortgage or invest.  No one really likes having debt hanging over their heads let alone a large one such as a home mortgage.  

So when we get that sudden raise at work or have extra money coming in from a side gig, it can be hard to decide the best way to use it.

Should we invest for our future or pay off our mortgage?  We will all retire one day.  So we definitely have to make sure we have a good nest egg in place by the time we reach retirement.  

But is it worth the sacrifice of not paying off your home to invest instead?  Sometimes, it is.

Here’s what you need to consider:

If the rate of return of your investment is greater than the interest rate of your mortgage, you should invest your money.  If not, you should pay off your mortgage.

Let's look at an example:

Let’s say you have a 30-year mortgage loan in the amount of $100,000 that has an interest rate of 3.5%. This means your monthly payments will be about $450.  And you will pay about $61,657 in interest over the length of the loan.  

However, if you make an additional $100 payment per month, you will save $18,829 in interest over the life of the loan.  And you will finish paying off your mortgage in 22 years.

If instead you choose to invest that additional $100 in the stock market for the next 22 years, you would have $62, 923.  God bless compound interest.  

That’s $44,000 more than what you would save paying more towards your mortgage. This is assuming that your rate of return would be 7% (after inflation).

If your actual rate of return is more like 5%, here’s what that $100 investment would turn into: $48,517.  That is still almost $30,000 more than the $18,829 you will save in mortgage interest.

And this is because that 5% rate of return is still greater than the 3.5% interest rate of the mortgage.  

So if you can get a rate of return greater than your mortgage interest rate it will always provide you with more money in the end.  (*Note: once the rates get too close, taxes might take too big a chunk out of your returns to make investing worth while.) 

But as they say, money isn’t everything.  Such a big decision like whether to pay off your mortgage or invest shouldn’t be left to a few quick calculations on your computer.  Besides, there are plenty of advantages to paying off your mortgage early.

Advantages of Paying Off Your Mortgage

Peace of Mind

There’s no doubt that paying off your mortgage early will give you peace of mind.  It is such a relief to have one less thing to worry about every month.  

And one less bill means that you will have more money to spend elsewhere.  Maybe you can finally take that vacation you’ve been putting off for ages or start saving up money for your child’s college tuition.

A Place That is Truly Your Own

Even if its not giving you the greatest return on your money, having your home fully paid off means it is truly yours.  No one can take it from you. (Well, as long as you continue to pay your property taxes.)  And that can be the best feeling. 

It can also give you something to brag about with your friends.  I mean you paid off your 30-year mortgage in just 15! How amazing is that!

Saves on Interest

Paying off your mortgage also has the added benefit of saving you lots on interest.  If you started doubling up payments from day one, you will end up saving tens of thousands of dollars.  

This could be well worth it.  Especially considering the relief you’ll feel once this debt burden is taken care of.

Another savings benefit is that making all these extra payments means the amount of interest you can deduct from your taxable income will increase as well.  

Saving you even more on your tax bill.  Just be sure that you itemize in order to take advantage of this tax break.

Predictable Rate of Return

With other investments you never really know what your rate of return will be.  A sudden down turn in the market can jack up all projections of what you thought you would have saved by this time ten years from now.

But by paying off your mortgage (or any debt for that matter) you know exactly what your rate of return will be – your interest rate.  It is especially good to pay off your debt if your interest rate is 5% or higher.

Access to Home’s Equity

Once you have paid off your house, you will now have the ability to tap into the full equity of your house in case of emergencies.  I don’t recommend just taking out a home equity line of credit (HELOCs) all willy-nilly. 

After all, it is still debt that you will have to repay with interest.

Besides, isn’t that what having an emergency fund is for? If you have your emergency fund set up properly, you shouldn’t need to pull from your home’s equity.  But it is good to have the option as you just never know what may hit the fan.

Financial Crisis Protection

In a huge financial crisis, having your mortgage paid off can really be a huge relief and a lifesaver.  That is a big expense that you wouldn't have to worry about if you are let go from your job and have to rely on unemployment.  

At least when a downturn hits, you will know that you won’t lose your house even if you do lose your job.

Disadvantages of Paying off Your Mortgage

Opportunity Costs

A huge disadvantage to paying off your mortgage early is that by doing so you may be missing out on opportunities to use your money more efficiently.  

You give up the chance to invest and have your money grow in the stock market.  You miss out on 'time in the market' and truly having compound interest work for you. 

Not to mention, you will be putting off saving for retirement, building up a proper emergency fund, or paying off other high interest debt in order to pay off the mortgage. 

And what about saving for other goals you may have? A wedding? Your children’s education? Can you afford to put that off as well?

So sure you can put those extra payments towards your mortgage but at what cost? You should make sure you are okay with everything you may be giving up to do so.

Your Money is Tied Up

Owning a piece of real estate, while it increases your net worth, it does tie up your money in an asset that is not very liquid.  This means that should you ever need access to the money you have invested in your house it will be hard to get to.

You would have to go through the whole shebang of finding an agent, locating a buyer, and hopefully selling the house before you can even see your money again. 

And you would have to pray that the housing market is doing well or you may have to sell your house at a loss.

This situation is not ideal especially if most of your money is tied up in your house.  You need to have diversified assets, which should include assets that provide you quick and easy access to your money.

Does Not Put Money to Best Use

This would be the biggest concern for me as I always want to use my money efficiently.  

And more often than not, your money will best used elsewhere such as in your 401k or Roth IRA where it can continually grow tax-free and where, over the long haul, you will probably get a greater return on your money.

The same is true if you decide to pay off your high interest credit card debt instead of putting the extra towards your mortgage.  Your pretty much guaranteed to get a better return by doing that as most credit cards charge 3 times that of a mortgage.

Bye Bye Tax Deduction

I only include this here because many people like to list this as a disadvantage to paying off your mortgage early (and it is a "perk" that will disappear).  

But, to me, that doesn't make much sense.  Sure the tax deduction is lovely when you have to pay interest but if given the choice to pay $7000 in interest or $0…umm, I’d take $0, please and thank you.

So while its true that you will lose this tax deduction by paying off your mortgage early, I am not quite convinced it’s such a bad thing.

Don’t Forget About Refinancing

If you are really just looking to free up some cash flow, refinancing might be the best bet.  Refinancing could greatly lower your monthly payments and the amount of interest you will pay in the long run.  

Furthermore, if you still pay the amount you had previously been paying on your mortgage, it could help you pay off you mortgage earlier.  And at the same time, you could use that extra money you have to invest.  

It's a win-win.  The best of both worlds: paying extra on your mortgage and investing for your future goals.  There's no need to decide whether to invest or pay off your mortgage because you can do both!

All in All

Deciding whether to invest or pay off your mortgage may not be so cut and dry as simply choosing the one that gives you the greatest return on your money.  

There are many things to consider such as your peace of mind, having stability and predictability, and a place that is yours.  Make sure you weigh all the pros and cons and make the best decision for you.

For me, my peace of mind is tied to how much money I got stashed.  So, the decision is quite easy. The one that's going to make me the most money, period.

In my opinion, it is almost always better to invest than to pay off a mortgage (unless said mortgage has a high interest rate of 6% or more, then you might wanna pay that thing off).  

When you invest, you are investing for the future.  And I think many of us don’t think that far ahead.  So many people are not prepared for retirement because they keep putting it off and thinking they can get to it later.  

Then, before they know it, later is here and they’ve got nothing saved.  So even if you can only spare a couple dollars a month I say start investing for your future now.

Wow, I got a wee bit distracted because I really think it is super important to start investing early. Haha.  Anyways, you gotta do what’s best for you! Hope this article helped!