Invest More or Pay Off Mortgage?

The classic debate – pay off your mortgage early, or invest that money?  For those of you who are homeowners, this is undoubtedly something you’ve tossed around.  Whichever route you choose, you really can’t go wrong.   Let’s go through some pros and cons of paying off your mortgage early.

This post assumes you don’t have any other high interest debt you still need to pay – such as credit card debt or maybe student loans.  If you have other consumer debt, that’s a whole different conversation.

Pros

Paying off your mortgage early does have a few awesome benefits.  You’re guaranteed a “return” equal to whatever your interest rate is.  Depending on when you got your mortgage, that could be a great guaranteed return.  For those of you who bought when interest rates dropped dramatically,

I hate debt, but who actually likes it anyways?  Paying off a mortgage early sounds incredibly appealing from an emotional standpoint.  The prospect of completely owning the roof over your head, beholden to no bank, seems like one of the most satisfying things you could accomplish.  Once you’re done making monthly mortgage payments, you’re budget widens up to really throw serious money into investments and savings.  The emotion benefit of paying off debt should not be ignored, even though it may not always be mathematically the best decision.

For those of you who are interested in retiring early, not having a mortgage payment can really reduce your annual expenses, reducing the overall amount you need invested to be financially independent.  The caveat there is that paying extra to your mortgage reduces the amount of time it will take your investments and savings to grow, so this could end up being a wash.

Cons

The con is pretty straightforward.  From purely a numbers standpoint, paying down your mortgage may not be the best financial decision.  Given that the average annual market return has been shown to be approximately 7% over the long term. if your mortgage interest rate is lower than that, you’re leaving money on the table. .  If your mortgage rate is above that, looking into refinancing to a lower rate might be a good option for you.

When we talk about average market return, we’re talking about the return of an index fund with broad market exposure, not individual stocks

Personally, we’ve landed somewhere in the middle.  We pay a little extra to our mortgage each month, and throw the rest in our taxable brokerage account.  Currently we’re at around a 7:1 investment to mortgage ratio, but we’re open to that changing.  It’s a topic we want to keep talking about regularly, to see if that ratio still aligns with our goals and priorities.  At the end of the day, it’s a tough decision with no wrong answer.  You have to decide what strategy makes the most sense for you and your circumstances.