Key Insights to Navigate Your Decision
- Your choice to either clear your mortgage or channel cash into investments ultimately hinges on your financial landscape and appetite for risk.
- Known as “good debt,” mortgages come with lower risk and interest compared to other loans. Still, if debt makes you jittery, knocking it out early could bring peace of mind.
- Alternatively, shoring up emergency funds and bolstering retirement savings first, then funneling surplus money into extra mortgage payments or market ventures, might suit your game plan.
Debt often gets a bad rap, seen as the villain munching away at your financial health. While tossing extra cash at high-interest debts like credit cards is often a no-brainer, the mortgage story is far more nuanced. Some financial gurus advocate steering funds toward the stock market for potentially richer yields, whereas others champion the emotional and financial relief of wiping out your mortgage debt first. To untangle this knot, here’s a compass for your considerations.
Mortgage Payoff or Investment? Let Risk Tolerance Be Your Guide
“The question boils down to, ‘How much risk can I stomach?’” — Ken Johnson, Walker Family Chair of Real Estate, University of Mississippi
Slashing your mortgage balance ahead of schedule can be financially savvy, but it’s not a one-size-fits-all solution. Interest rates and market vibes matter: your investment returns might just outpace the savings from chipping away early on your loan.
Mortgages stand apart from other debt since they’re linked to a tangible asset — your home — which generally rises in value over time. This reality nudges some financial experts to suggest leveraging your mortgage instead of burning it down. Signing up for a three-decade loan and keeping it around while tossing extra cash into investments or other ambitions is a popular tactic.
Claire Mork, Financial Planning Director at Edelman Financial Engines in Denver, frames it aptly: “Mortgages are the cheapest money anyone can borrow; they’re a financial instrument, not just a burden.”
Yet, dissenting voices like Chris Hogan, Nashville-based author of Everyday Millionaires, urge rapid mortgage payoff, viewing debt as a lurking danger.
Ken H. Johnson sums it up: Both routes have logic behind them, but your personal risk tolerance—how much market rollercoaster you can stomach—is the compass you need.
Risk tolerance is less about spreadsheets and more about your personal grit to handle market dips and potential losses.
If keeping your financial goals alive means staying invested, that path might be your best bet. If your priority is asset preservation and solid ground, leaning on home equity is traditionally safer territory.
Crucial Points to Ponder Before Choosing Your Path
- Emergency Cushion: Do you have a three-to-six-month buffer saved for life’s curveballs?
- Debt Load: How much other debt is on your plate?
- Income Trajectory: What’s your outlook on increasing your earnings?
- Life Moves: Any big plans in the next year or five that could impact your housing or finances?
- Mortgage Rate vs. Investment Gains: How does your current mortgage interest stack up against anticipated returns from your portfolio?
Experts often recommend having a neat emergency fund before considering aggressive mortgage paydown or investments. Retirement savings, too, should be marching along steadily before extra cash finds its way into other financial buckets.
When planning moves—whether you’re eyeing relocation or refinancing—assessing how much of your monthly payment chips away at principal vs. interest can clarify your equity-building progress. Midway through a loan term? Staying put and growing investment pots could be the strategic play.
As for comparing rates, a handy rule of thumb: if your mortgage rate is below your expected investment returns—say, the historic average stock market return of roughly 7-10%—it might pay off to keep the loan and supercharge your investments instead.
Snapshot of Key Mortgage Stats:
| 30 years | 6.5% | $510,178 |
| 20 years (early payoff) | 6.5% | $315,750 |
Strategy One: Crush Your Mortgage Early
Accelerating mortgage payoff can slash your interest bill substantially depending on your rate and timing. Tools like amortization calculators help visualize how much interest you trim by tossing extra money at your principal.
Why It Rocks:
- Banishing that monthly mortgage payment frees up cash flow.
- The earlier you pay it off, the fewer interest dollars you hand over.
- Lower debt can bump up your credit score, giving your financial reputation a lift.
Why It Might Sting:
- Dumping all spare funds into your mortgage locks your money in home equity—liquidity? Forget about it unless you refinance or sell.
- You forfeit the mortgage interest tax deduction, a little perk that helps soften costs.
- Historically, homes appreciate slower than the broader stock market, potentially leaving gains on the table.
Chris Hogan’s research into millionaires revealed a trend: many hustle to obliterate debt faster, trimming their lifetime interest payments drastically.
Strategy Two: Embrace Your Mortgage and Invest
Wondering what your investment haul might look like? Take this scenario: starting with $10,000 and adding $10,000 annually over a decade, expecting 7% growth, could balloon your stash to around $157,836. That’s nearly 60% more than your total contributions.
Why You Might Dig This:
- The stock market historically delivers about 10% annual returns — if your mortgage rate is cheaper, your investments could outpace your debt.
- Investments like stocks, bonds, and ETFs are liquid assets — you can cash out when life throws a curveball.
- Retirement accounts can sweeten the deal with company matches and tax incentives.
The Risks You Should Know:
- Markets ebb and flow—bad years can bite hard.
- Your mortgage remains a fixed monthly obligation even while you’re juggling investing.
Though a 30-year mortgage boasts manageable monthly payments—especially if refinanced during low-rate windows—be aware you might fork over a hefty interest sum across those decades, potentially sacrificing retirement nest egg growth.
“Many feel compelled to pay off their house before retirement,” Mork points out. “But it doesn’t have to be a hard-and-fast rule.”
The Personal Take: Morgan Housel’s Story
Morgan Housel, Wall Street veteran and author of The Psychology of Money, and his wife live mortgage-free, a move he calls “financially irrational” on paper.
He admits, “It’s the dumbest financial decision we’ve ever made, yet the best for our peace and independence.”
Their mortgage payoff was an emotional win—a moment they celebrated with high-fives and hugs. Sometimes, Housel argues, prioritizing emotional well-being over pure numbers pays dividends.
His takeaway? “Chasing every last cent of returns can drain you emotionally. Financial decisions should serve happiness and restful nights, not just spreadsheets.”
Common Questions Answered
Will Paying Off Your Mortgage Early Hurt Your Credit Score?
According to Experian, wiping out your mortgage won’t tank your credit score drastically. However, if no new mortgage replaces it within about ten years, your score might dip slightly due to a shorter credit history and less account variety.
Where Should I Put Extra Cash Aside from Mortgage Paydown?
Beyond throwing money at your mortgage principal, investment avenues are vast and varied—think college savings plans, retirement accounts, and more. A financial advisor can tailor options that sync with your goals and risk profile.
Mortgage vs. Buying an Investment Property: What’s Smarter?
If you’re close to settling your mortgage and crave the peace that comes with it, paying it off might be your best bet. On the flip side, if you eye an investment property before clearing your current loan, evaluate whether you can juggle two mortgages and the upkeep that accompanies them. Crunching your expected ROI on the investment property and chatting with a financial professional can shed light on this choice.