Should I pay off my mortgage or invest?

Is it better to pay off your mortgage or invest?

Coming into a little extra cash or freeing up some room in your budget is a great situation to find yourself in and putting that money to good use—even better. Two great options are making additional payments towards your mortgage to lower the amount of interest you’ll pay over time or investing that money into retirement savings. But how do you determine which is more beneficial?

When deciding between accelerating mortgage payments or investing, several factors should be considered:

• Your financial goals
• Your mortgage interest rate
• How long until your home is paid off
• Whether your loan accepts prepayment
• The stage of life you’re in
• Your risk tolerance
• The kind of return you can expect from investing

Because everyone has different goals and circumstances vary, the information in this article, or any article for that matter, should not be taken as individual investment advice. Instead, use this information as a guide for discussing your investment options with a financial professional, preferably a fiduciary. If you don’t have one, we can connect you with an experienced financial professional in your area.

Paying off your mortgage early vs. investing

The choice between paying off your mortgage early and investing in retirement may seem like a competition between taking care of the present vs. preparing for the future. However, it’s not quite that simple. Each has its advantages and both options can have lasting impact.

Why interest is a determining factor

Interest plays a major role in deciding whether to pay off your mortgage early or invest for retirement, because it directly affects how much you’ll pay on your loan vs. how much you could earn on your investments. For instance, if your mortgage rate is 3% and your investments average 6%–7% annually over time, you could come out ahead by investing.

It’s also worth noting that mortgages are generally structured so that during the early years, the larger portion of each payment goes towards interest. Being more aggressive in the early years by making extra payments can save you a tidy sum over the life of the mortgage. The key is determining whether you’ll gain more from saving on interest costs or from the returns on your investments. Online mortgage-amortization calculators and savings calculators can help with the comparison. Keep in mind that the return on investments is not guaranteed.

Let’s say you have $50,000 to either put towards paying off your mortgage 10 years early or to invest in the stock market for the 10 years. To keep it simple, we’ll set both the mortgage interest rate and the estimated average market return at 6%. Based on these numbers, the amount saved in interest would be about $17,000. If you invested, you could make estimated returns of around $41,000.

These calculations would then need to be balanced against several factors like your risk tolerance, how far out you are from retirement, and your current finances to name a few.

Advantages of paying off your mortgage first

Paying off your mortgage before investing can be seen as a more conservative, low-risk strategy focused on financial security and peace of mind. The advantages include:

• Saving money on interest payments.
• Freedom to redirect cash flow and use your income elsewhere.
• The peace of mind that comes from owning your house.
• The ability to manage debt and prevent yourself from becoming overextended financially.

If you’re thinking about paying off your mortgage early, it’s important to check the terms of your mortgage for pre-payment penalties and other conditions to avoid unpleasant surprises.

Advantages of investing first

Choosing to invest rather than paying off your mortgage is a strategy that leans into long-term growth potential by putting your money to work in the market. Advantages of this approach include:

• The potential for higher returns as the market tends to outperform property appreciation.
• Greater liquidity since it’s generally easier and quicker to sell stocks than real estate.
• Diversifying your holdings in the stock market is easier than in real estate.
• Consistent investing over time, especially in tax-advantaged retirement accounts, allows you to reap the benefits of compound interest.

When should you prioritize paying off your mortgage?

Paying off your mortgage early might be the right move if:

• You’re in the earlier part of the mortgage where payments go mostly towards interest.
• You want to reduce your debt-to-income ratio.
• Your mortgage rate is higher than current investment returns.
• You’re close to retirement and want to reduce fixed expenses.
• You’re already maxing out retirement accounts and have extra funds to put towards your mortgage.
• You prefer the peace of mind of owning your home as a buffer against economic uncertainty. That’s why the purchase of a house is a smart time to make sure you have enough life insurance to protect your family home in case something happens to you or your spouse.

When should investing be your focus?

In some situations, investing may offer greater long-term rewards, if for instance:

• You have a low, fixed mortgage rate and you can make the payments comfortably. In this situation, life insurance can be used as an additional measure to ensure your family can continue to make mortgage payments if anything should happen to you.
• You’re well into your mortgage and your payments are going mostly towards the principal.
• The interest rate you pay on your mortgage is lower than the interest you would earn by investing in the market.
• You’re comfortable with the ups and downs of the market.

The decision to pay off your mortgage vs. investing comes down to what you value most. Paying off your mortgage offers security and guaranteed savings while investing offers the potential for greater long-term returns. In some cases, doing both (investing while making extra mortgage payments) might be the best path forward. Educational tools like online payoff- mortgage-vs.-invest calculators can be used as starting point, and a financial professional can help you model different scenarios to choose a strategy that aligns best with your goals, whether that’s freedom from debt, a stronger retirement, or simply more peace of mind.

Pay off mortgage vs. investing FAQs

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