Pay Your Mortgage Early or Invest?

Should You Pay Off Your Mortgage Early?

Pay Your Mortgage Early or Invest?

Should you pay your mortgage off early?

If you’re a homeowner and are fortunate enough to have accomplished the first several steps on the road to financial security — you’ve saved an emergency fund, paid off high-interest debt and are saving for retirement — you’ll ly begin to fantasize about living mortgage-free. You could be done paying interest, done with big monthly payments and own your home free and clear.

If you’ve given any serious thought to paying off your mortgage early, you’ve ly come across two competing opinions on the matter:

  1. Yes! There’s no such thing as “good debt.” Pay off your mortgage as soon as you can, get a guaranteed return on your money equal to your mortgage interest rate. It’s the only sensible thing to do.
  2. No! With mortgage rates so low, you should be investing any extra money at a higher interest rate. Plus, mortgage interest is tax deductible, providing an additional incentive.
  3. Another option! Going for a mortgage refinance to open up another sum of money at a competitively low interest rate. If you’re intrigued by the mortgage refi route, start here.

Let’s explore.

Stocks are a risk, but your mortgage payment will always be due.

The biggest argument against paying off your mortgage early is that you could get a much higher rate of return by investing. The S&P 500 has yielded an average annual return of about 10% for the past 88 years.

But those returns have also been wildly inconsistent. For example, since 2000 there have been two major reversals in the stock market, and we might be going through another one right now.

How would it be for you if you accumulated $100,000 in your stock portfolio over the past 10 years – instead of paying off your mortgage early – only to see an ugly bear market wipe out 50% of your portfolio?

One of the inherent problems with investing in risky assets is that the returns are neither consistent nor guaranteed. However, when you owe money on a debt, especially a very large one a mortgage, your liability is fixed. That is to say that even if your stock portfolio takes a big hit, your mortgage will be a fixed obligation. That includes both the balance owed and the monthly payment.

Few people regret paying off debt.

There are huge psychological benefits to a debt-free life.

Even with a relatively low interest rate on your mortgage (let’s say 4%), paying it off provides a guaranteed return, plus the elimination of your monthly mortgage payment.

No matter what the historic track record of the stock market is, there is no guarantee that your portfolio will perform at that level over the next 10 or 20 years.

How much better would you sleep with no mortgage payment?

As much as we might think of financial decisions as being a numbers game, they do come with the potential for both psychological and emotional problems. If you don’t think that you could stomach losing a bunch of money on your stock portfolio while you still owe a fortune on your house, you’re almost certainly better off focusing on paying off your mortgage.

If being debt free is more important to you than having a large investment portfolio, concentrating your efforts on paying off your mortgage is the better course.

No! Paying your mortgage early is silly

We already know that the common argument against paying off your mortgage early is to earn larger returns in the stock market. The historic return on stocks invested in the S&P 500 has been on the order of 10% per year going all the way back to 1928. It doesn’t make sense to pay off a mortgage that has a 4% interest rate, and give up ly returns on equity investments of 10%.

It could be argued that once your mortgage is paid off, you’ll have more money to invest in stocks. But even if you’re able to reduce a 30 year mortgage to 15 years, you will still have lost 15 years of compound investment earnings. That’ll be close to impossible to make up.

But this is risky, and there’s nothing wrong with forgoing larger (but riskier) returns for a guaranteed return and peace of mind. But there are other, perhaps more compelling, arguments against paying down a mortgage early.

Your home will be a disproportionate percentage of your net worth.

By paying off your mortgage early, it’s ly that a large amount of your net worth will be tied up in your home. This comes with its own risks. Real estate is often considered a safer investment than stocks, but it’s not without risks. If you need to sell your home during a soft real estate market, you may lose money or — worse — be unable to liquidate at all.

Similarly, consider what would happen if a life event required you to come up with a lot of cash — more than you have in emergency savings. Imagine you become unemployed for many years, need extensive medical care, or decide to invest in a business.

Stocks can be easily sold to finance such needs, but if your net worth is tied up in your home, you would either have to sell your home or rely on a home equity loan (going back into debt). If you don’t mind the idea of tapping home equity, then this argument is less persuasive.

And indeed, if you do pay off your home early, taking out a home equity line of credit (just in case) can be a good idea, even if you never plan to use it.

You won’t realize the benefits of extra mortgage payments for many years.

With the exception of swashbuckling business people who use massive loans as leverage to acquire millions, most of us want to become debt free. But not everyone has a willingness to make it happen. There’s no ignoring the fact that paying off a massive debt a mortgage will require a whole lot of sacrifice. Are you willing to pay that price?

As an example, let’s say that you have a $250,000 30-year mortgage at 4.25% that you want to pay off in 15 years. Your current principal and interest on the loan is $1,230 per month. In order to pay it off in 15 years, you’ll have to increase the monthly payment to $1,881. That’s an increase of $651 per month, or $7,812 per year.

Coming up with that extra money every year will be a huge commitment. It’s certainly possible, but you’ll have to understand the sacrifices required to get there.

For example:

  • If you have a fixed-rate loan, you won’t realize any benefit until the loan is actually paid in full. (Your payment will not go down as you pay down the mortgage balance.)
  • If you abandon the early payoff effort before you complete it, you will have even more money tied up in your home than you have now; this is sometimes referred to as dead equity since it has no return, and produces no immediate benefit.
  • As we mentioned above, if you need money from the equity in your home — because that’s where all of your extra cash has gone over the past few years — you will have to borrow the money out with a second mortgage or home equity line, which will reverse all of the good that was done with the early payoff effort.

Since it will ly take at least 10 or 15 years to pay off a mortgage early, it’s best if you have a large emergency fund so that you are not repaying your mortgage with money that you can’t afford to lose. Un paying off other debts, credit cards or car loans, a mortgage loan is a long-term project, and you need to be ready for contingencies.

If you lose your job, you could be screwed.

Let’s drive home again the point that your home is not a liquid asset. There are only two ways to get cash the home:

  1. Borrow against it
  2. Sell it

We just discussed how borrowing money against your home will virtually defeat the purpose of paying it off early. But there is an additional complication if you lose your job: it’s unly that you will be able to obtain a loan against your home if you’re unemployed.

During a period of prolonged unemployment, your only choice may be to sell your house in the event that cash is especially tight.

Once again, a plan to pay off your mortgage early should come with a companion commitment to building up a large emergency fund that will see you through a time of prolonged unemployment.

Mortgage interest is tax-deductible. 

For most people, home mortgage interest is the single largest income tax deduction they have. It’s even possible that paying off your mortgage will make it impossible for you to itemize deductions on your tax return.

This points to another tax related consideration: If your current mortgage rate is 4.25% , but you have a combined federal and state marginal tax rate of 40% , the effective rate on your mortgage is only 2.55% (4.25% x .60).

Realizing that your effective rate is that low could make you more willing to entertain the risks of pursuing higher returns in the stock market.

Refinancing is worth considering

If you’re considering paying off your mortgage early, you may have some equity built up. That makes you a great candidate for a refinance. You may be able to get a lower interest rate and/or reduce your monthly payments to free up some extra money. You can then put that excess aside or invest it.

It’s never been easier to refinance your loan, thanks to tools Credible. Credible shops lenders and provides multiple quotes for your refinance without affecting your credit score. You can review those quotes and decide if refinancing is the best option for you.

Credible also lets you do a cash-out refinance, which is something to consider if you’re thinking about paying your mortgage off early. With a cash-out refinance, you can take some of your home’s equity as a loan. In some cases, your monthly mortgage payment won’t change and you’ll have some extra funds to save, renovate your house, pay off debt, or whatever else you need.

Figure is another online lender that makes refinancing a breeze. Credible, Figure helps with cash-out refinancing, but they also do home-equity lines of credit. Of course, you can do a straight refinance if you want to lower your monthly payment or change the terms of your loan (Figure offers 15- and 30-year fixed terms).

You can even opt for a cash-out jumbo refinance, if you have a high-cost property. You can refinance up to $1,000,000, with a $500,000 cash-out max. Or, if you’re just looking for better loan terms, figure offer jumbo rate refinancing up to $1,500,000. 

You’ll also get quotes from multiple lenders with one quick application with Figure. One great feature in Figure’s favor is how quickly you’ll have access to your funds if you’re doing a cash-out refinance. In some cases, your funds will be in your account in less than a few days.

¹ For Figure Home Equity Line, APRs can be as low as 2.49% for the most qualified applicants and will be higher for other applicants, depending on credit profile and the state where the property is located. For example, for a borrower with a CLTV of 45% and a credit score of 800 who is eligible for and chooses to pay a 4.

99% origination fee in exchange for a reduced APR, a five-year Figure Home Equity Line with an initial draw amount of $50,000 would have a fixed annual percentage rate (APR) of 2.49%. The total loan amount would be $52,495.

Your actual rate will depend on many factors such as your credit, combined loan to value ratio, loan term, occupancy status, and whether you are eligible for and choose to pay an origination fee in exchange for a lower rate. Payment of origination fees in exchange for a reduced APR is not available in all states.

In addition to paying the origination fee in exchange for a reduced rate, the advertised rates include a combined discount of 0.75% for opting into Credit Union Membership (0.50%) and enrolling in autopay (0.25%). APRs for home equity lines of credit do not include costs other than interest.

Property insurance is required as a condition of the loan and flood insurance may be required if your property is located in a flood zone. 


Paying a mortgage off does not come without risks. There is the risk of opportunity cost – that the return on an equal amount of money invested in stocks could be more beneficial than paying off your mortgage early. There is also the risk that you could face a prolonged career crisis that a large home equity position won’t help.

What are your thoughts on paying off your mortgage early? Do you think the benefits outweigh the risks?

Read more:


Should you pay off your mortgage early or invest? We did the math to find out which nets a greater return

Pay Your Mortgage Early or Invest?

Personal Finance Insider writes about products, strategies, and tips to help you make smart decisions with your money. We may receive a small commission from our partners, but our reporting and recommendations are always independent and objective.

Debt can often be a thorn in your side on the path to building wealth, but it's not all bad.

Still, if you're a homeowner with a mortgage, you've ly weighed the decision to pay it off early, if you can afford to. It's a worthy goal to be free and clear of all debt, but is it the right choice if you're trying to optimize your every dollar?

We consulted Brian Fry, a certified financial planner who founded Safe Landing Financial. He said the answer really depends on the specifics of the situation, but generally the biggest factor in deciding whether to pay off a mortgage early or invest your extra cash from a windfall, salary raise, or some other source is the interest rate.

Here are his high-level recommendations. Scroll down for the full set of assumptions he used. 

  • Best action: Refinance and invest more aggressively, because a 15-year fixed mortgage with a rate of 2.33% is much lower than the market's expected rate of return.
  • Second-best action: Refinance and pay the mortgage aggressively. If the homeowner doesn't agree with long-term investment-return estimates and would rather act more conservatively, they can pay off the mortgage and then invest and still come out OK.
  • Third-best action: Don't refinance and pay the mortgage more aggressively. The homeowner will be debt-free 100 months sooner by putting an extra $24,000 a year toward the loan balance.
  • Worst action: Don't refinance, don't invest, and spend the extra cash instead. If the homeowner did not refinance and decided to spend the money, they would not have extra retirement savings, if that's their goal.
  • Second-worst action: Don't refinance, and still invest the extra cash. A 6.15% interest rate you may have locked in year ago on your loan is higher than the market's expected rate of return. If the homeowner is locked into a higher interest rate, it's best to pay off the debt first.

If the rate on your mortgage is higher than what you might make by investing the cash, it's often better to pay down your debt before investing more, Fry said.

That is, unless you consider refinancing to secure a lower rate, he said. In fact, refinancing can be a good option whether or not you ultimately decide to pay your mortgage aggressively. Interest rates fluctuate and they're currently at historic lows, so be sure you shop around before making a decision or running your own numbers.

But Fry said it's also crucial to look at how far you are from retirement, how long you plan to stay in the home, whether you have other high-interest debt, the possibility of tax deductions, and the status of your emergency fund and retirement savings. There are non-financial factors to think about as well.

“It's really important to have a good understanding of what you're trying to accomplish before determining the best course of action,” he said. And if you need help, a fee-only financial planner can be a great resource, he said. 

To help illustrate the debate between paying off your mortgage early versus investing, we asked Fry to run a simulation. Below are the assumptions he used:

The hypothetical

A homeowner just got a raise that will net them an additional $24,000 a year after taxes. They plan to stay at this job, and it's unly they'll get any more raises or cost-of-living adjustments. (This figure was used for the purposes of this calculation; a smaller raise or windfall would yield similar results.)

They have an established emergency fund and no other debt, and they're already maxing out their 401(k) and IRA. They plan to stay in their home forever and retire in 15 years, at 65.

Their initial mortgage balance was $400,000 on a 30-year fixed-rate loan they got in 2006 with an interest rate of 6.15%. They are 15 years into their mortgage and have a remaining balance of $285,058.

If they refinance to a 15-year fixed mortgage, their interest rate would be 2.60%. Refinancing costs are estimated to be $6,000, for simplicity. Generally, refinancing costs are 1.5% to 4% of the remaining mortgage balance.

Their nest egg is diversified, and they are looking to make the best financial decision about how to use the extra income to maximize their wealth. Do they use this extra money to pay off their mortgage more aggressively, or invest more aggressively?

The calculation

Fry used Right Capital, a financial-planning software, to calculate how much the homeowner would have in a taxable investment account in 15 years using a straight-line analysis.

The variables are whether they refinance their mortgage, and whether they put their additional income (and savings from refinancing, if available) into an investment fund or put it toward their loan balance.

Fry used the Vanguard Total Stock Market Index Fund, which has a long-term annual return of 5.38%, according to JPMorgan estimates. He said it's important to remember that the market doesn't go up by the same percentage every year: Some years offer better returns, while others may have negative returns.

Invest more aggressively:

  • If the homeowner refinances their mortgage and invests what they save on monthly payments plus $24,000 a year, in 15 years they will have paid off their mortgage and have an investment-account balance of $616,641.
  • If the homeowner does not refinance their mortgage and invests the $24,000 a year, in 15 years they will have paid off their mortgage and have an investment-account balance of $489,592.

Pay mortgage more aggressively:

  • If the homeowner refinances their mortgage and uses the amount they save on monthly payments plus the $24,000 additional income to pay it down more aggressively and then invest, in 15 years they will have paid off their mortgage and have an investment-account balance of $580,660.
  • If the homeowner does not refinance their mortgage and uses the $24,000 additional income to pay it down sooner and then invest, in 15 years they will have paid off their mortgage and have an investment-account balance of $531,355.


Pay Off Your Mortgage Early Vs. Investing: Which Is Best?

Pay Your Mortgage Early or Invest?

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Though you may be a proud homeowner, you probably don’t love the thought of having to make a mortgage payment each month for the next few decades. But considering how well the stock market has been performing lately, it might feel you’re missing out by not investing more.

So what’s the right answer: Should you pay your mortgage early or invest your extra funds? Here’s what you should know to help you make a decision.

Pay Mortgage Early or Invest: What Does the Math Say?

You probably dream of the day when you no longer have a mortgage payment hanging over your head. Being debt free is an admirable goal, but it might not make the most sense financially. Especially now, with mortgage rates so low, it’s cheap to hold debt. That leaves the opportunity to grow your wealth more through other investments.

Let’s take a look at an example. Say you have a 30-year mortgage of $200,000 with a fixed rate of 4.5%. Your monthly payments would be $1,013 (not including taxes and insurance), according to our mortgage calculator, and you’d spend a total of $164,813 in interest over the life of the loan.

Now let’s say that you’re able to come up with an extra $300 per month to put toward your mortgage. You’d shave off 11 years and one month from your repayment period, plus save $67,816 in interest.

On the other hand, you could take that $300 per month and invest it in an index fund that tracks the S&P 500 Index instead. Historically, the S&P 500 has returned an average of 10% to 11% annually since its inception in 1926 through 2018. If you want to be extra conservative, however, we can assume an average annual return of 8% on your investment.

At the end of 19 years (about the length of time it would take to pay your mortgage early), you would have $160,780. That’s more than double your potential interest savings. In fact, after that length of time, you’d have about $105,487 left on your mortgage. If you decided to pay your mortgage early after all, you could use your investment funds and still have $55,293 left over.

Reasons to Pay Your Mortgage Early vs. Invest

From a financial perspective, it’s usually best to invest your money rather than funneling extra cash toward paying your mortgage off faster. Of course, life isn’t just about cold, hard numbers. There are many reasons why you might choose either to pay your mortgage early or invest more.

Benefits of Paying Off Your Mortgage Early

  • Interest savings: This is one of the biggest benefits of paying your loan off early. You could save thousands or tens of thousands of dollars in interest payments. When you pay your mortgage early, those interest savings are a guaranteed return on your investment.
  • Peace of mind: If you don’t the idea of constant debt, paying your mortgage early could ease your burden. If you experience a financial emergency, having a home that’s already paid off means you don’t have to worry about missing mortgage payments and potentially losing the home to foreclosure.

    You still will be responsible for property taxes as long as you own the home, but that’s a much smaller financial responsibility.

  • Build equity: Paying down your mortgage faster means building equity in your home more quickly. This can help you qualify for refinancing, which can save you even more money in the long run.

    You may also be able to leverage your equity in the form of a home equity loan or home equity line of credit (HELOC), which you can use to make improvements that increase your home’s value or pay off other higher-interest debt.

Drawbacks of Paying Off Your Mortgage Early

  • Opportunity cost: Any extra money you spend on paying down your mortgage faster is money you aren’t able to use for other financial goals. You may be paying off your mortgage early at the expense of your retirement savings, emergency fund or other higher return opportunities.

  • Wealth is tied up: Property is an illiquid asset, meaning you can’t convert it to cash quickly or easily.

    If you faced a financial emergency or had an investment opportunity you wanted to jump on, you’d not only have to sell your house, but also wait until a buyer was available and the sale closed.

  • Loss of some tax breaks: If you choose to pay down your mortgage instead of maxing out your tax-advantaged retirement accounts, you will give up those tax savings. Plus, you may lose out on tax deductions for mortgage interest if you normally itemize.

Benefits of Investing Your Extra Cash

  • Higher returns: The biggest benefit of investing your money instead of using it to pay down your mortgage faster is the ROI.

    For many years, average stock market returns have been significantly higher than mortgage rates, which means you stand to gain quite a bit from the difference.

  • Liquid investment: Un a home that ties up your wealth, having your money in stocks, bonds and other market investment means you can easily sell and access your money if you need to.
  • Employer match: If you choose to invest your extra funds in a retirement account and your employer offers a match, that’s additional free money that you get to enjoy compound earnings on over time. You’d also be investing pre-tax dollars, which could help you afford larger contributions.

Drawbacks of Investing Your Extra Cash

  • Higher risk: There is more volatility in the stock market than in the housing market year over year, so you should be sure your investing timeline is long enough to weather ups and downs.

    You also need to make sure that your investment strategy matches your risk tolerance and you’re mentally prepared to take some hits.

  • Increased debt: Choosing to invest your money may not be the best option if you don’t the idea of having debt to your name.

    Until your mortgage is repaid, you don’t actually own your home—the bank does. And there will always be some risk that you could lose your home if you aren’t able to make the payments.

Best of Both Worlds: Refinance and Invest

If you’re still on the fence about which option is best, you may not need to choose between paying your mortgage early and investing. Rather, you can take a two-pronged approach to reducing your debt and growing your wealth.

Mortgage rates are at historic lows, which means it’s a great time to refinance.

If you took out your mortgage or last refinanced years ago, it’s ly that you can save quite a bit of money by refinancing to a lower interest rate and/or reducing your mortgage term length.

That’s true whether or not you also choose to pay down the loan more aggressively. Just be sure to factor in closing costs when running the numbers.

With your newfound mortgage savings in place, you can go ahead and invest, too. This allows you to spend less on your mortgage overall while still taking advantage of the higher returns of the stock market.


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