Should You Put Extra Money in Your 401(k) or Pay Off Your Mortgage? Making the Smart Financial Choice

We can all agree that having extra money every month is a good thing. But figuring out where to put that money can be hard, especially if you want to save more for retirement or pay off your biggest debt. I’ve been studying this question for years, and the answer isn’t as simple as you might think.

The Financial Dilemma We All Face

If you’re like most homeowners, your mortgage is probably your biggest monthly expense. That big number staring at you every month makes it tempting to throw extra cash at it whenever possible. On the other hand, retirement experts are constantly reminding us that we’re not saving enough for our golden years.

So what’s the right move? Should you accelerate your mortgage payments or pump up your 401(k) contributions? Let’s break down the pros and cons of each approach.

The Case for Investing in Your 401(k)

1. You’ll likely get a better return

When we crunch the numbers, investing in a 401(k) often comes out ahead mathematically. Here’s why:

• Most mortgages have relatively low interest rates (often between 3-6%)
• The stock market has historically returned around 7% annually over the long term
• Your contributions grow tax-deferred until retirement

Let’s look at an example from MyBankTracker:

If you have a $200,000, 10-year mortgage with 4% interest and pay an extra $200 a month toward the principal, you’d:

• Save about $44,000 in interest
• Pay off your mortgage 8 years earlier

But if you invested that same $200 monthly in your 401(k) instead:

• Assuming a 7% annual return over 30 years
• Your nest egg would be worth approximately $235,000 more
• Even after subtracting the mortgage interest you paid, you’d still come out ahead by nearly $100,000!

2. You get tax advantages now and potentially later

Your 401(k) contributions:

• Reduce your current taxable income
• Grow tax-deferred until withdrawal
• May include employer matching (free money!)

As Rebecca Lake from MyBankTracker points out “You need the tax deduction.” When you pay off your mortgage early, you actually lose the mortgage interest tax deduction which can be valuable, especially for those in higher tax brackets.

3. You can’t take a loan for retirement

One of my favorite points from the Ameriprise article is simple but powerful: “While you can take a loan for a mortgage, you cannot take a loan out to fund your retirement.”

If you’re not maximizing your retirement accounts (especially if you’re eligible for catch-up contributions), it generally makes sense to prioritize retirement saving before accelerating mortgage payments.

When Paying Off Your Mortgage Makes Sense

Despite the mathematical advantage of investing, there are several scenarios where paying down your mortgage faster might be the right choice.

1. You’re approaching retirement

If you are planning to retire soon, having a home that is paid off will save you a lot of money each month when your income may be lower. During retirement, not having to worry about a mortgage payment can be very helpful.

2. You value peace of mind over potential returns

Some people simply sleep better at night knowing they’re debt-free. It’s hard to put a price on the security you may feel when you own your own home outright, as the Ameriprise article says. “.

3. Your mortgage interest rate is high

If your mortgage rate is significantly higher than what you could reasonably expect from investments, the guaranteed “return” of paying off high-interest debt becomes more attractive.

4. You’re debt-averse

Some individuals just don’t like carrying debt, regardless of the potential financial benefits. If being debt-free is a personal financial priority, accelerating mortgage payments aligns with your values.

Finding a Middle Path

The good news is this isn’t necessarily an either/or decision. Many financial advisors recommend a balanced approach:

1. First, ensure you’re getting any employer match – This is literally free money!
2. Pay off high-interest debt – Credit cards and personal loans should generally be eliminated before extra mortgage payments
3. Build adequate emergency savings – Have 3-6 months of expenses saved before accelerating either goal
4. Consider a blended approach – Split your extra money between retirement contributions and additional mortgage payments

Practical Ways to Pay Off Your Mortgage Faster While Still Investing

If you want to do both, here are some strategies from Ameriprise that won’t derail your investing plans:

• Make biweekly payments: By paying half your monthly payment every two weeks, you’ll make the equivalent of 13 payments annually instead of 12.

• Add small, regular “overpayments”: Even an extra $100-200 per month can significantly reduce your loan term.

• Use windfalls wisely: When you receive tax refunds, bonuses, or inheritances, consider applying a portion to your mortgage principal.

• Refinance strategically: Switching to a shorter-term loan (like going from a 30-year to a 15-year mortgage) can help you pay off the loan faster, though your monthly payment will increase.

When Your Life Circumstances Matter

Your personal situation plays a huge role in this decision. According to the article from The Nest, consider these factors:

If you’re planning to move soon

If you don’t plan to stay in your current home long-term, putting extra money into the mortgage might not make sense. As MyBankTracker notes, “Paying off your mortgage early really doesn’t make financial sense if you’re not planning to stick with it in the long haul.”

If job security is a concern

In uncertain economic times, having a paid-off mortgage provides security. You can’t lose a house that’s fully paid for if you experience a period of unemployment.

If your time horizon is long

The longer your investment horizon, the more likely your 401(k) investments will outperform the interest savings from paying off your mortgage early.

My Personal Take

I’ve wrestled with this decision myself, and here’s what I’ve learned: there’s no one-size-fits-all answer. The mathematically optimal choice is usually to invest, especially if you’re young and have time on your side. But personal finance isn’t just about math—it’s about what helps you sleep at night.

For me, I’ve chosen a hybrid approach. I max out my employer match first (cause who doesn’t like free money?), then split any extra funds between additional 401(k) contributions and extra mortgage payments. This gives me both the potential growth from investing and the satisfaction of watching my mortgage balance decline faster than scheduled.

The Bottom Line

Before making your decision, consider:

• Your mortgage interest rate vs. potential investment returns
• Your tax situation and whether you itemize deductions
• Your risk tolerance and how you feel about debt
• Your retirement timeline and overall financial goals
• Whether you have adequate emergency savings and other debt
• Your job security and income stability

Remember that the “right” answer depends on your personal circumstances, financial goals, and emotional preferences. While the math might favor 401(k) investments, your peace of mind might favor mortgage repayment—and there’s real value in that too.

What’s your approach to this financial dilemma? Are you team 401(k), team mortgage payoff, or somewhere in between? I’d love to hear your thoughts in the comments!

Final Thoughts

Whatever you decide, make your choice deliberately after considering all factors. And don’t forget to reassess periodically as your circumstances and goals change. The most important thing is taking proactive steps toward financial security, whichever path you choose.

An Ameriprise financial advisor or other financial professional can help you evaluate your specific situation and determine the best approach based on your comprehensive financial picture.