Pay Off Mortgage or Invest? 5 Things to Consider Before You Decide

A woman planning her finances

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Alyse Maguire
Alyse Maguire
July 21, 2024 at 11:44PM UTC

You’ve hit a crossroads in your financial journey. You have some money to spend, maybe from a work bonus, successful side gig, or recent inheritance—or you’ve just done a hell of a job saving up your last few paychecks—and are now wondering, “What should I do with it? Should I pay off my mortgage or invest?” 

Well, both are great paths, but which one you follow depends on a number of factors. Below, we outline five things you should consider to make the smartest decision for you in deciding whether to invest or pay off your mortgage.

1. Your mortgage interest rate

One of the best factors in choosing between investing your money and putting it toward mortgage payments comes down to simple math: Will your investment returns exceed the interest you’re paying on your home loan?

A general rule of thumb, says Gloria Garcia Cisneros, a Certified Financial Planner and Wealth Manager at LA-based investment consultancy LourdMurray, is that if your interest rate is below 4 or 5%, you’re better off putting your money to work now rather than sending it away to a lender, as you’ll net more in the long term. “If you’re in a diversified portfolio, the average return in the market is anywhere from 8 to 10%.” 

But if your interest rate is more like 7-10%, she says, you’re better off paying as much as you can toward your mortgage today to avoid that cost accumulating over time.

2. Your commitment to your home

People buy homes for many reasons, some financially driven and some emotionally driven. And those reasons shift over time in ways you can’t always predict, sometimes making it harder to stick around. 

If you’re not positive that you want to—or will be able to—live in your house for years to come, paying off your mortgage quickly may not make sense for your financial situation. 

“Once you put money into the mortgage, it can’t come out. It’s not liquid,” Garcia Cisneros says. That's one disadvantage of paying off a mortgage. “If you do choose to pay off your home, then your hands are tied.” 

On the other hand, if you see this as your forever home, building equity by getting ahead on your mortgage payments can set you up for success down the road by increasing the value of your property, should you decide to sell, and thus your net worth.

3. Your age

When you’re young, you have decades to build wealth through investments—which can then be put toward a mortgage or other major purchases. As you get older, earning significant returns becomes harder without time on your side. 

“Someone who’s young can take the risk, has the time for their money to grow” in investments, Garcia Cisneros says. For those later in life, however, having one less debt in retirement may hold greater value than making a little extra cash.

4. The importance of other purchases or debt

Other debts, whether credit card or student loans, may take precedence over a mortgage or investment opportunity. “Make sure you have already paid off higher interest rates,” Garcia Cisneros says. “If you have credit cards or personal loans that are above 10%, you should be paying both of those things off before you even look at this.”

Beyond handling your most pressing (and pricey) expenses first, you should also consider whether you have enough saved up for important life matters, says Robert Johnson, a Certified Financial Planner and Professor of Finance at Creighton University’s Heider College of Business in Nebraska. 

“If mortgage payments are so large as a percentage of monthly income that people can’t adequately fund their retirement account or a child’s college education account, then it may be wise to simply pay your mortgage over the normal term of the loan,” he explains. 

Alternatively, “If buyers are in the financial position to make their mortgage payments and fund other life goals,” he says, “then paying off a mortgage early may provide them with greater financial security by allowing them to extinguish the debt sooner.”

He adds that when those who are financially secure pay off their mortgages early, they’re able to more easily weather other setbacks that may come their way, such as losing a job or facing a health emergency. (Of course, a strong investment portfolio could also act as a safety net for unexpected events.)

5. Your peace of mind

At the end of the day, you have to feel good about your financial decisions. If paying off debt will give you more peace of mind, don’t discount the value of that, Garcia Cisneros says. “We have a lot more of a feeling around debt than we do around growth,” she says. “So the losses kind of impact us more than the wins.”

“One cannot understate the psychological benefits many people get from paying off a large debt,” Johnson says. “That is why many people celebrate by burning mortgage papers. This is particularly true for individuals who have experienced financial hardships due to profound economic events like the [2008] financial crisis.”

The only disadvantage to this mindset, Johnson warns, is letting settling up be your sole focus, so much so that you miss out on other just as crucial opportunities for generating long-term stability and freedom.

“If it crowds out other activities, it can be a wealth-destroying activity,” he says. “For example, one of the most important financial decisions anyone makes in their life is the decision to participate in an employer-sponsored retirement plan. Perhaps the worst financial mistake anyone can make is turning down free money.” 

“People should be lauded for paying down debt,” he says. “However, making that the only financial priority is misguided. The quote ‘all things in moderation’ certainly applies to prepaying mortgages.”

If you do decide to invest, read this next: Women and Investing: 8 Strategies to Empower Yourself and Invest With Confidence

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