You’re not the only one who has looked at their bank account after getting a bonus or an inheritance and wondered, “Should I pay off my mortgage or put this money in the stock market?” People in America can’t sleep because of this financial crossroads, and the answer isn’t as simple as some “experts” might have you think.
I’ve spent countless hours researching this topic, and I’m gonna break down everything you need to know to make the smartest choice for YOUR specific situation. Because let’s be real – what works for your neighbor might be totally wrong for you.
The Core Dilemma: Security vs. Growth
Before we dive into the math (don’t worry I’ll keep it simple) let’s understand what we’re really talking about here
Option 1: Pay off your mortgage early
- Eliminate one of your biggest monthly expenses
- Save potentially thousands in interest payments
- Own your home outright – no risk of foreclosure
- Enjoy that warm fuzzy feeling of being debt-free
Option 2 Invest your extra cash instead
- Potentially earn higher returns than your mortgage interest rate
- Keep your money more accessible (liquidity)
- Take advantage of compound growth over time
- Diversify your wealth beyond just your home
Let’s Talk Numbers: What Math Says About This Decision
Can you make more money by investing than you’d save by paying off your mortgage? That’s all there is to it when it comes to math.
Interest Savings from Early Mortgage Payoff
Say you owe $200,000 and have 10 years left on your loan. Based on your rate, find out how much interest you could save by paying it off early:
| Interest Rate | Total Interest for 30 Years | Interest Saved by Paying Off 10 Years Early |
|---|---|---|
| 3.5% | $123,312 | $20,270 |
| 4.5% | $164,813 | $28,411 |
| 5.5% | $208,808 | $37,618 |
Pretty significant savings, right? But let’s see what happens if you invested that money instead.
Potential Investment Returns
It depends on the average return, but here’s what you might get if you put $100,000 away for 10 years:
| Rate of Return | Investment Gain After 10 Years |
|---|---|
| 2% | $22,019 |
| 5% | $62,889 |
| 7% | $96,715 |
| 10% | $159,374 |
Looking at these tables, you can see that if your mortgage rate is 3.5% but you can earn 5% or more investing, the math starts to favor investing. At higher returns like 7% or 10%, you could potentially earn WAY more than you’d save on mortgage interest.
But wait – there’s more to consider beyond just raw numbers!
When Paying Off Your Mortgage Makes the Most Sense
Despite what some investment gurus might tell you, there are definitely situations where eliminating your mortgage is the smart move:
1. You Have a High Interest Rate
If your mortgage rate is 6% or higher, the guaranteed “return” from paying it off might beat what you could reliably expect from investments after accounting for risk.
2. You’re Close to Retirement
Many financial planners recommend entering retirement debt-free. Having no mortgage payment can significantly reduce your monthly expenses when you’re living on a fixed income.
3. You’re Super Risk-Averse
Let’s be honest – investing always carries risk. The stock market could crash right after you invest. If the thought of losing money keeps you up at night, the guaranteed return from paying off your mortgage might be better for your mental health.
4. You Crave Financial Security
There’s something deeply satisfying about owning your home free and clear. No one can take it away if you lose your job or face other financial hardships.
As Casey Bond, a personal finance writer, says: “Focus on building a strong financial foundation before aggressively paying down your mortgage.”
When Investing Is Probably the Better Choice
On the flip side, there are plenty of scenarios where investing makes more mathematical sense:
1. You Have a Low Mortgage Rate
If you locked in a mortgage below 4%, you’ve got a pretty sweet deal. Historically, the stock market has returned around 10% annually over the long term (though past performance doesn’t guarantee future results).
2. You’re Behind on Retirement Savings
If your retirement accounts aren’t where they should be, maxing out your 401(k) and IRA contributions probably should take priority over mortgage prepayments – especially if you get employer matching (hello, free money!).
3. You’re Young with a Long Time Horizon
The younger you are, the more time your investments have to grow and recover from market downturns. This makes investing potentially more lucrative than paying off low-interest debt.
4. You Need Liquidity
Once you put extra money into your house, it’s not easy to get it back out without selling or taking out a home equity loan. Investments are generally much more accessible if you need cash in a hurry.
The Middle Path: Why Not Both?
Here’s a little secret – this doesn’t have to be an either/or decision! Many successful people take a balanced approach:
- Set up an emergency fund first (3-6 months of expenses)
- Pay off high-interest debts like credit cards
- Contribute enough to your 401(k) to get any employer match
- Split extra funds between mortgage prepayments and investments
This strategy gives you the psychological boost of seeing your mortgage balance drop while still building your investment portfolio.
As Amy Fontinelle, a personal finance expert, suggests: “Consider a two-pronged approach: refinance your mortgage to a lower rate and invest the savings.”
Important Factors Most Articles Miss
When researching this topic, I noticed several crucial points that often get overlooked:
Tax Implications Matter
The mortgage interest deduction isn’t as valuable as it used to be since the standard deduction nearly doubled in 2018. About 90% of taxpayers now take the standard deduction instead of itemizing.
However, investments in taxable accounts incur capital gains taxes when you sell. Tax-advantaged accounts like 401(k)s and IRAs can help mitigate this.
Risk Isn’t Theoretical – It’s Real
Many financial analyses assume steady investment returns like 7% or 10% annually. But real-world returns are lumpy and unpredictable. Your investments could lose 30% in a bad year.
Meanwhile, paying off your mortgage gives you a guaranteed return equal to your interest rate. There’s value in that certainty.
Different Investments Have Different Risk Profiles
If you’re comparing mortgage payoff to investing, the type of investments matters enormously:
- U.S. Treasury bonds are considered very safe but currently yield less than most mortgage rates
- S&P 500 index funds have historically returned about 10% annually but with significant volatility
- Real estate investments can generate passive income but require more work and reduce liquidity
Your Home Is More Than Just a Financial Asset
We sometimes forget that our homes aren’t just numbers on a spreadsheet – they’re where we live our lives. The emotional benefit of owning your home outright might outweigh pure financial calculations for many people.
A Practical Framework for Making Your Decision
Still unsure what to do? Here’s my step-by-step approach:
-
Check your foundation first
- Do you have adequate emergency savings?
- Are you contributing enough to retirement accounts to get employer matches?
- Have you paid off high-interest debt like credit cards?
-
Assess your mortgage situation
- What’s your interest rate?
- How many years remain on your loan?
- Do you plan to stay in the home long-term?
-
Evaluate your investment options
- What types of investments are you comfortable with?
- Do you have tax-advantaged accounts available?
- What’s your time horizon before you need the money?
-
Consider your personal preferences
- How important is being debt-free to you emotionally?
- What level of investment risk can you tolerate?
- Do you value liquidity and financial flexibility?
As Chris Jennings, a personal finance expert, emphasizes: “Remember that there’s no one-size-fits-all answer.”
Real-World Example: How It Plays Out
Let’s look at a concrete example to bring this to life:
Meet Sarah, who has a $250,000 mortgage at 6% interest with 25 years left. She just received a $50,000 inheritance and is trying to decide what to do with it.
Option A: Put $50,000 toward her mortgage
- Reduces her loan balance to $200,000
- Saves approximately $88,000 in interest over the life of the loan
- Shortens her loan term by about 7 years
Option B: Invest $50,000 in a diversified portfolio
- Assuming a 7% average annual return, grows to about $193,000 after 25 years
- Keeps her mortgage payment the same
- Provides more liquidity if she needs funds
In Sarah’s case, investing appears to win mathematically. However, if she’s planning to retire in 10 years, having a smaller mortgage might be more valuable to her than the potential investment growth.
The Bottom Line: Trust Your Gut (After Doing the Math)
After all my research and crunching the numbers, I’ve come to this conclusion: the mathematically optimal choice isn’t always the right one for YOUR life.
Yes, historically, investing has outperformed mortgage interest rates. But personal finance isn’t just about maximizing every dollar – it’s about creating a life that feels secure and aligned with your values.
Do the math, consider your unique situation, and then make the choice that helps you sleep better at night. For some, that’s a paid-off home. For others, it’s a growing investment portfolio. And for many, it’s a balanced approach that includes both.
Whatever you decide, the fact that you’re thinking about this question already puts you ahead of most Americans. Good luck with your decision!
What’s your experience been with this dilemma? Have you chosen to pay off your mortgage early or invest instead? I’d love to hear your thoughts in the comments!
Crunching the numbers: Pay off mortgage or invest?
You get back the amount of money you would have paid in interest if you paid off your mortgage early. What you don’t know is the return you would have gotten on the money if you invested it instead.
Here’s one scenario:
Learn more: Strategies to help pay off debt faster
When is it better to invest instead?
- If you haven’t saved enough for retirement or invested enough, you should start. If you aren’t maxing out your contributions to your 401(k), IRA, or other retirement accounts (or making larger catch-up contributions if you’re eligible), you should do so before you think about paying off your mortgage. At the end of the day, you can borrow money to pay for a house, but not to save for retirement.
- If you have a low-cost mortgage: Did you refinance or get a mortgage when interest rates were very low? If so, investing your money is likely to earn you more than the interest you would save by paying off your mortgage.
- If you only want to keep your home for a short time: If you don’t plan to live there for many years, it might be best to only make the minimum mortgage payments to protect yourself from a possible dip in the housing market. Home values don’t always go up.
- History is on the side of long-term investors, but it’s important to remember that returns on investments are not guaranteed if you are willing to take more risk. Markets go through cycles, and when you invest for a long time, you will inevitably experience times when your money goes down.
- If you need more cash, stocks, bonds, and money in the bank are much more liquid than home equity. It might be better to invest your money than pay off your mortgage if you need cash quickly. Most of the time, it’s harder to get money out of your home equity than from investments in a portfolio.
Before you consider paying down your mortgage, address other high-interest debt and build an adequate cash reserve. So, if you have an unexpected cost or a hard time with money, you won’t have to borrow money at high interest rates or sell investments for less than they’re worth.
Should You Pay Off Your Mortgage Early or Invest? | Financial Advisor Explains
FAQ
Is it better to invest or pay off a mortgage?
You can either buy an investment or pay off your mortgage. If the returns on your investment are greater than your mortgage’s interest rate, you are better off investing. If the returns are lower than your interest rate, you are better off paying the mortgage.
Does Dave Ramsey recommend paying off a mortgage?
Dave Ramsey, the renowned financial guru, has long been a proponent of financial discipline and savvy money management. This can include paying off your mortgage early, but only under specific financial circumstances.
Is there a downside to paying off your house?
Cons. Miss out on investment gains: One bad thing about paying off your mortgage early is that you might miss out on the growth that your money could earn in other places. For example, the S&P 500 has returned 11. 95% annually over the past 50 years, or roughly 8% when adjusted for inflation.
Do most millionaires pay off their mortgage?
A house that you don’t have to pay for is also a great way to get rich. When you get rid of your house payment, you have a lot of extra money each month that you can put toward retirement. In fact, the average millionaire pays off their house in just 10. 2 years,” according to Ramsey’s website.