Pay Off Your Mortgage or Invest: What Does The Math Say? (2024)

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. Sometimes, when interest rates are low, it’s cheap to hold debt. Under those ideal market conditions, it 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) 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 to modern times. 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.

Here are some reasons why you may—or may not—want to consider paying off your mortgage early.

Pros

• 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 like 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, and condo fees if you live in a condo, but both are a much smaller financial responsibility, even when taken together.
• Build equity:Paying down your mortgage faster means buildingequity in your homemore quickly. This can help youqualify 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 ahome equity loanorhome 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.

Cons

• 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.
• You may have to pay a penalty: If you pay more than your contracted mortgage payment each month or pay back your entire mortgage before the end of your term, including through proceeds generated by the sale of your home, you may have to pay a prepayment penalty, which could cost thousands of dollars.

Investing your extra cash instead of paying off your mortgage early has some benefits and drawbacks. Here are the main ones to consider.

Pros

• Higher returns: The biggest benefit of investing your money instead of using it to pay down your mortgage faster is the ROI, especially when market conditions mean that returns are significantly higher than mortgage rates. In this particular market environment, you could gain quite a bit from the difference.
• Liquid investment:Unlike 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.

Cons

• 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 like 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.

Though likely not your current situation, when you have a low mortgage rate, it may not make sense to pay off your mortgage early when you could invest that money instead. Your investment returns could be double what you’d save by not paying as much mortgage interest. Also, mutual fund and ETF investments give you more liquidity than locking up your money in your home equity.

For guaranteed savings and the security of owning your home debt free, paying off your mortgage earlier is a better option than investing your extra cash. It’s also a good option if your mortgage rate is comparable or higher than the investment returns you would earn, especially if you would be investing in a fully taxable brokerage account where your net returns would be lower than a tax-advantaged retirement account.