Pay Off Mortgage Or Invest: How To Make The Right Choice
October 31, 2023 7-minute read
Author: Sidney Richardson
Whether you just got a raise and are considering how to best use those extra dollars or you’re planning for the future, choosing where to invest your hard-earned cash can be a challenge. It makes sense that many homeowners would want to prioritize paying down their mortgage debt, but does it make more sense to invest extra cash in your retirement savings first?
Before making the decision to either invest or pay off your mortgage, let’s explore the pros and cons of each – or doing both.
Should I Pay Off My Mortgage Or Invest?
Whether you decide to pay down your mortgage or invest in your future first depends on your personal financial situation. If your income has increased substantially, the choice you make may differ from your choice if you inherited a lump sum and wanted to invest that.
If you’re thinking of paying off your mortgage early, consider how much it would cost and if the money saved in interest as well as being debt-free is a higher priority for you than putting away money to build your future wealth. Consider where you’re at with debt repayment, too. It’s typically smarter to pay down your mortgage as much as possible at the very beginning of the loan to avoid ultimately paying more in interest. If you’re in or near the later years of your mortgage, it may be more valuable to put your money into retirement accounts or other investments.
If you’re uncertain about investing a lot of money in a place where your rate of return isn’t promising, maybe investing all of your extra cash is unwise. Ultimately, your decision should reflect your financial situation and the choices you’re most comfortable making.
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Choosing To Pay Off Your Mortgage Early
It can be enticing to think about completely paying off your mortgage and not only owning your home but also being debt-free. While many people with an influx of cash might favor investing rather than paying off their mortgage, paying off your mortgage early can save you thousands of dollars in the long run and is often a solid financial decision.
If you’ve received a raise or some other increase in your income and you’re still in the early years of your mortgage and paying mostly interest on your mortgage payments, paying off your mortgage early might be the best option for you.
Let’s take a look at some of the pros and cons of deciding to pay off your mortgage rather than invest.
Pros Of Paying Off Your Mortgage
- You’ll save on interest. If you pay off your mortgage early, you can potentially save thousands of dollars in interest you might have paid if you hadn’t reduced the principal amount early on.
- You’ll be debt-free. Owning your own home and not having to make any more monthly payments can be liberating. Depending on the size of your monthly payments, that’s $1,000 or more a month you can now use elsewhere.
- You can leverage your equity. If you decide to pay off a large chunk of your mortgage early, you can use that equity to open a home equity line of credit (HELOC) or do a cash-out refinance to make some renovations to your home. While you won’t pay off your loan if you go this route, you’ll be able to use some of the cash you poured into your home, which usually isn’t easily doable.
- You’ll free up funds going forward. If you’re no longer making mortgage payments, this money can now go to other causes, like investing in your future or personal hobbies.
Cons Of Paying Off Your Mortgage
- You could cut into savings. While using your savings to pay down a huge chunk (or all) of your loan may seem like a good idea, it can be risky to pour all of your money into an investment that’s not the easiest to tap into in a pinch. No matter how tempting it may be to do otherwise, it’s important to set some cash aside for
- It might be your only investment. If you’re pouring everything you have into your mortgage, you may be neglecting other important investments, such as your retirement fund. You could also be earning a greater return on investments in somewhat riskier places, such as the stock market.
- No more tax deductions. If you pay off your mortgage early, you lose a potential tax deduction on mortgage interest payments. This write-off is actually quite useful and can increase your refund as well as lower your taxable income if you’re still paying on a mortgage.
- You might pay prepayment penalties. Depending on your lender, you may actually incur a penalty for paying off a mortgage too quickly. If you pay off a mortgage within the first few years of the loan, your lender may charge you a penalty based on the outstanding principal balance.
Choosing To Invest Your Money
While paying off a mortgage early can have many benefits to homeowners and lifts the burden of repaying a large debt, it might be wiser to invest extra cash into your future in the form of retirement funds or other investments such as stocks.
The best time to pay off a mortgage is early, which allows you to avoid accruing extra interest over the years, and the same is essentially true of investing in your future. Since interest builds over time, the longer your monetary contributions are saved for your future, the more they’ll be worth when it’s time to use them. That said, starting early on investing is a very solid financial choice as well.
Now let’s take a look at some of the pros and cons of investing rather than paying off your mortgage.
Pros Of Investing Your Money
- You’ll see a higher rate of return. Since it’s inherently riskier, investing in something like the stock market gives you the potential to earn more money than you would save by paying off your mortgage early.
- You’re increasing your future wealth. By investing in your retirement and future, whether through stocks, bonds or even a small business, you’re (hopefully) increasing your future wealth. By building wealth that will only grow over time, you’re setting yourself up to be better off financially later on in
- Better asset liquidity. As for liquidity, stocks, bonds and similar investments are superior to a mortgage. If you find yourself needing cash, selling stocks or similar investments and making use of that money will be much easier than selling your home or attempting a cash-out refinance.
- There’s potential for an employer match. If you’re investing in a retirement account, some employers may be willing to match your contributions. Your employer might match half of your contributions up to a certain percent of your salary or even match your investment dollar for dollar. The more you’re investing, the more you stand to gain – so this can be a great opportunity to build future wealth if your employer is willing to participate.
Cons Of Investing Your Money
- Investing is riskier. Unlike paying off a mortgage, investing is risky. You have the potential to gain and then lose thousands of dollars when investing in the stock market. Your returns may exceed your returns from paying off a mortgage, but they aren’t as safe and fixed.
- You’re still making payments. Investing costs you money – money you’re not even guaranteed an entirely favorable return on. Throwing all of your money into an investment only to see it decrease in value can be frustrating.
- Investing doesn’t make your debt go away. If you’re pouring all of your funds into a retirement account or other investments, you won’t make much progress on any debts, whether they be student loans or your mortgage. While it’s possible with investing to eventually save enough to take care of these debts, it might be smarter to pay them off before doing anything else.
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Deciding To Pay Off Mortgage And Invest
It may be possible to both pay down your mortgage and invest at the same time – and many people do. While choosing to do both at once limits the amount you can invest in your home or your future wealth, you can make decent progress toward each goal as a compromise. This way, you can put money away for your future while also building equity in your home.
If you’re still eager to get your mortgage out of the way as quickly as possible, you can even consider refinancing to a shorter-term loan. While your payments will be higher, you might be able to still invest while also saving money on mortgage interest and building significant equity in your home. This strategy can be costly, however, so be aware that it may significantly deplete your savings.
If you have an influx of cash and it doesn’t make sense to put it entirely into your mortgage or investments, other options may be worth considering. To avoid the potential for a financial struggle in the event of an unexpected circumstance, you could store your extra cash in an “emergency fund” to help deal with a financial obligation like car repairs, medical expenses or a lost job.
If you have other debts, such as student loans or credit card debt, you could also put your extra capital there. If you’re paying for a mortgage on top of multiple other debts, it can become overwhelming – so it’s always a good idea to get those lingering debts off your shoulders, if possible.
The Bottom Line: Decide Whether Investing Or Paying Off A Mortgage Is Best For You
Both investing in your future wealth and paying off a mortgage early can be extremely beneficial for savings and return on investment. Everyone’s financial situation is different, however, so it’s wise to carefully consider which option would work best for you before making a move. It’s always a good idea to consult a financial advisor who can help you make a plan.
Remember, it’s also possible to pay down your mortgage and invest at the same time – particularly if you’re able to refinance to a shorter-term loan. If that’s something you’re interested in, start the refinance process with Rocket Mortgage® today.
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