Pay Off Mortgage Or Invest: What’s The Best Option?

If you’ve received a substantial raise in your job or a sudden cash windfall, you may be wondering if you should pay off your mortgage early. Paying off your mortgage can bring peace of mind, but you could be missing out on potential income by not investing that money.

Whether to pay off the mortgage or invest your money is a personal decision everyone will have to make for themselves. Which you should choose depends on your values and current financial circumstances.

This article will review the pros and cons of both decisions, and whether there is a middle ground you can consider.

Should You Pay Off Your Mortgage Or Invest?

If your financial situation has improved to the point where you can consider paying off your mortgage early, you’re in an enviable position. But you still have to decide whether paying off your mortgage is the right decision or if you should use those funds as an investment.

Whether you should pay off your mortgage early or invest that money depends on a variety of factors. For instance, it depends on how risk-averse you are – investing in the stock market is riskier than investing that money in your home.

You should also consider whether there are other options you should look at first, like refinancing. Refinancing your home can be another good option for lowering your monthly payments and total interest paid.

But before you make any final decisions about whether to pay off the mortgage or invest, you should take a good look at your financial situation. This can help you determine which is the right choice.

Consider Your Financial Situation

If you’re wondering whether you should pay off your mortgage early or start investing, you should take some time to evaluate your financial situation. First, you should consider how close you are to retirement.

If you plan to retire soon, it may make sense to pay off your mortgage early and lower your monthly expenses as much as possible. But if you’re young and have several decades to save for retirement, you may want to start investing as soon as possible.

You should also consider how long you plan to live in your home. For instance, if you’re living in your dream home and have no plans to move, it could make sense to pay off your house early. But if you’re planning on moving in a couple of years, you may want to invest that money.

And finally, you should also consider your personal goals and how comfortable you are with debt. If you’ve always dreamed of being debt-free, then the financial math may not matter to you as much.

The Pros And Cons Of Paying Off Your Mortgage

The desire to become debt-free is admirable, but there are pros and cons to paying off your mortgage early. Let’s look at a few things you should consider first.

Pros

• Savings on interest: Paying off your mortgage early could save you a lot of money in interest payments. For instance, let’s say you take out a $400,000 mortgage for 30 years at a 5.1% interest rate. Once you’ve made all your payments over the 30-year term, you’ll have paid $381,847.67 in interest – that’s nearly as much as your original mortgage! But if you pay off your loan after 15 years, you’ll spend $173,129.08 in interest, which saves you more than $200,000 in total interest paid.
• Peace of mind: Paying off your mortgage early can bring additional peace of mind since you won’t have to worry about your monthly payment. This can free up your money for additional expenses, like investing. And if you face a financial emergency in the future, it will be easier to handle if your monthly expenses are low.
• The opportunity to build equity: Paying off your mortgage early builds equity in your home. If you decide to sell your home in the future, you’ll receive that equity as a cash payment. But even if you don’t decide to sell your home, you can tap into your home’s equity to cover a major expense.

Cons

• Prepayment penalties: Some mortgage lenders charge a prepayment penalty if you pay off your home early. Prepayment penalties typically cost 2% of the outstanding loan balance when you pay it off. However, this would have been something you agreed to upfront so you should check your loan documents to see if there’s a prepayment penalty.
• Loss of tax deductions: If you itemize your taxes, you can write off your mortgage interest and mortgage insurance premiums. That means you’ll lose these deductions if you pay off your home early. However, this downside won’t matter if you take the standard deduction instead of itemizing.
• A reduction in savings: The money you put toward your mortgage is money you won’t be able to invest or save for retirement. And you won’t be able to make up for any interest lost by not investing in the market (assuming you’ll make more interest on your investments than interest you pay on your mortgage).
• Not a liquid investment: Paying off your mortgage helps you build equity, but that isn’t a liquid investment. Instead, your wealth is tied up in your home and may be harder to access if you need it.

The Pros And Cons Of Investing Your Money

Just like paying off your mortgage early comes with pros and cons, there are things you should consider about investing as well.

Pros

• Increased future wealth: Investing your money is a good way to build future wealth. The money you invest today will continue to earn compound interest, leading to greater wealth over time.
• Higher ROI: Investing your money will likely lead to a bigger ROI than paying off your mortgage. Stock market returns have been significantly higher than mortgage rates, so you could see substantial gains by investing your money.
• Employer match: If your employer will match your retirement contributions, that’s free money you wouldn’t have access to otherwise. And since you’re investing pre-tax dollars, you’ll be able to contribute more than you would otherwise.

Cons

• More time required: Investing is a long-term strategy, and you’ll see the biggest gains if you can leave your money in the market for a long time. If you’re nearing retirement, you may not have the time you need to realize those types of gains.
• Higher risk: Investing in the stock market is riskier than paying off your mortgage. The stock market can be volatile, and there’s no guarantee you won’t lose your money. In comparison, the housing market is fairly stable and home prices tend to increase in value over time.
• Continuing payments: If you choose to invest that extra money, you’ll still have a monthly mortgage payment. That means you’ll continue to carry debt, and if you’re unable to make your payments in the future, the bank can repossess your home.

Pay Down Mortgage Or Invest: Can You Do Both?

If you’re on the fence about whether you should pay down your mortgage or invest, there may be a way you can do both. This looks like simultaneously paying down your mortgage as quickly as possible while also investing in the market.

Doing both allows you to reduce your overall debt while building wealth at the same time. And as you continue to save and invest more money, you may have more money available to put toward your mortgage.

However, it’s hard to focus on two financial goals at once so your returns may not be as good as if you went all-in on a single strategy. And focusing on the mortgage and investing could mean that you have less money to put toward other financial goals.

Refinance And Invest

Another option worth considering is refinancing to a shorter-term loan while investing at the same time. For instance, refinancing to a 15-year mortgage will help you obtain a lower interest rate and save money over the life of the loan.

And you can invest any money that is left over into the market. That’s a great way to accomplish both goals at once. However, you should factor in closing costs when you’re trying to figure out whether refinancing is worth it.

The Bottom Line

Whether you should pay off your mortgage or invest ultimately depends on you, your goals, and your financial situation. Paying off your mortgage early brings peace of mind and helps you build equity in your home, but you will lose out on potential investment savings.

Investing your money often leads to a bigger ROI and increased wealth, but it’s riskier than putting your money into your home. If you’re on the fence about these two options, it is possible to do both – refinancing to a short-term term loan and investing the rest can be a good way to accomplish both goals at once.

If you’re interested in learning more about refinancing, you can get started with Rocket Mortgage® today.