Pay Off Mortgage Or Invest: How To Make The Right Choice

Whether you’re planning for the future or you just got a raise and are trying to decide how to best use those extra dollars, choosing where to invest your hard-earned cash can be a challenge.

It makes sense that many homeowners want to prioritize paying down their mortgage debt, but is it better to invest extra cash elsewhere first? Before making the decision to either invest or pay off your mortgage, explore the pros and cons of each – or doing both.

Should You Pay Off Your House Or Invest?

Choosing to pay down your mortgage or invest in your future depends on your personal financial situation.

If you’re thinking of paying off your mortgage early, you’ll want to consider:

• Your current priorities: Think about how much it would cost and if the money you’d save in interest and by having less debt matters more to you than putting away money to build your future wealth.
• How much of your mortgage is paid off: It’s typically smarter to pay down your mortgage as much as possible early on 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 isn’t the right move. Ultimately, your decision should reflect your financial situation and the choices you’re most comfortable making.

Choosing To Pay Off Your Mortgage Vs. Invest

It can be enticing to think about completely paying off your mortgage and not only owning your home but also being debt-free – at least where monthly mortgage payments are concerned. 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 an increase in income and are still in the early years of your mortgage and making mortgage payments that go primarily toward interest, paying off your mortgage early might be the best option for you.

Pros Of Paying Off Your Mortgage

Paying off your mortgage comes with several possible or inevitable advantages.

Interest Savings

If you pay off your mortgage ahead of schedule, you can potentially save thousands of dollars in interest you would’ve paid if you hadn’t reduced the principal amount early on.

Cost Savings

Owning your own home and not having to make any more monthly mortgage payments can be liberating. Depending on the size of your monthly payments, the money you save in payments could translate to thousands of dollars you don’t have to spend.

The Chance To Leverage Home Equity

If you decide to pay off a large chunk of your mortgage in advance, you can use that equity to open a home equity line of credit (HELOC) or get 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 – and that usually isn’t easily doable.

Freed-Up Funds

If you’re no longer making mortgage payments, the money you were putting toward your mortgage can now go to other causes, such as personal hobbies or investing in your future.

Cons Of Paying Off Your Mortgage

As with any financial decision, paying off your mortgage early has a few disadvantages worth taking into consideration.

Possible Depletion Of Your 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 overnight. No matter how tempting it may be to do otherwise, it’s important to set some cash aside for emergencies.

Limited Investment Opportunities

If you’re putting any extra money you have toward your mortgage, you may be neglecting 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.

A Lack Of Tax Deductions

If you pay off your mortgage early, you lose a potential tax deduction on mortgage interest payments. This write-off, which only applies to taxpayers who itemize deductions, can be quite useful and increase your refund as well as lower your taxable income if you’re still paying on a mortgage.

The Potential For Prepayment Penalties

Depending on your lender, you may incur a prepayment penalty for paying off a mortgage too quickly. If you pay off a mortgage within the first few years of the loan, some lenders will impose a penalty on you based on the outstanding principal balance. Rocket Mortgage® does not have prepayment penalties.

Choosing To Invest Vs. Pay Off Your Mortgage

While paying off a mortgage early can offer many benefits to homeowners and lift 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. Meanwhile it’s best to invest early because you’ll gain interest. The longer your monetary contributions are saved for your future, the more they’ll be worth when it’s time to use them since interest builds over time. That said, getting an early start on investing can also be a solid financial choice.

Pros Of Investing Your Money

You’ll want to start by exploring the advantages of investing for your future, instead of paying off your mortgage.

A Higher Rate Of Return

Since it’s inherently riskier, investing in the stock market or something comparable gives you the potential to earn more money than you’d save by paying off your mortgage early.

An Increase In Your Future Wealth

By investing in your future, whether through stocks, bonds or even a small business, you’re likely increasing your future wealth. By building wealth that will only grow over time, you’re setting yourself up to be better off financially later in life.

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.

The 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 they may 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

It’s now time to consider the disadvantages of investing, rather than paying off your mortgage.

Riskier Investments

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.

Continued Payments

Investing costs you money – money you’re not even guaranteed an entirely favorable return on. Throwing all your money into an investment, only to see it decrease in value, can be frustrating.

Ongoing Debt

If you’re allocating all your funds to 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.

Choosing To Do Both: Pay Off Your 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.

Consider Refinancing

If you’re still eager to get your mortgage out of the way as quickly as possible, you might consider refinancing to a shorter-term loan with a potentially lower interest rate.

While your payments will be higher, you may be able to still invest while saving money on mortgage interest and building significant equity in your home. This strategy could deplete your savings, however.

Other Considerations

If you have an influx of cash and it doesn’t make sense to put it entirely into your mortgage or investments, these options may be worth considering:

• Building an emergency fund: To avoid or reduce the potential for a financial struggle in the event of an unexpected circumstance, you could store your extra cash in an “emergency fund.” Unexpected circumstances include but aren’t limited to car repairs, medical expenses and job loss.
• Paying off other debts: You could also put your capital toward other debts, such as student loans or credit card debt. Paying a mortgage on top of numerous other debts can become overwhelming, so it’s always a good idea to get those lingering debts off your shoulders if possible.

The Bottom Line: Whether To Pay Off A Mortgage Or Invest Isn’t Always Clear

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 don’t make a move before carefully considering which option would work best for you. Consulting a financial advisor who can help you make a plan may be especially beneficial.

Remember, it’s also possible to pay down your mortgage and invest at the same time – particularly if you can refinance to a shorter-term loan. If that possibility piques your interest, start the refinance process with Rocket Mortgage^® today.