It’s a big decision. Should you pay off your mortgage or invest? Most people can’t wait to get rid of their monthly mortgage payments, but it comes with a cost. Whenever you put extra money towards your mortgage, you’re giving up the chance to invest those funds somewhere else.
Is it worth it?
Let’s find out.
Paying Off Your Mortgage Early – Pros & Cons
There are plenty of benefits to paying off a mortgage early, but there are just as many downsides. When you ask yourself if should I pay off my house or invest, you should consider these pros and cons.
Advantages Of Paying Off Your Mortgage Early
1. You’ll save on interest
No one likes paying interest, so knowing that you could save thousands of dollars on it is already a huge benefit. Whether you pay off your mortgage in full or make extra monthly payments, you’ll reduce your principal balance faster, which lowers your overall interest.
2. Peace of mind
Debt can keep you up at night. It can even cause anxiety, depression, and other health problems, especially when you can't keep up.
In the event of an emergency, it may even be difficult to choose between making your monthly mortgage payment or handling the current situation. Lenders typically allow only two to three months of late payments before placing a loan in default and doing so puts your home at risk.
Therefore, it’s best to pay off these amounts as soon as possible to prevent accumulating interest, future financial problems, and the risk of foreclosure.
3. Build equity faster
When you pay extra towards your mortgage balance, you build equity faster. Equity can help you in several ways:
- You might get better terms on a rate/term to refinance
- You might be able to take the equity out and use it for other purposes
- You’ll pay less interest on the loan in the long run
Disadvantages Of Paying Off Your Mortgage Early
1. You might miss other opportunities to invest
The opportunity cost of paying off your mortgage early is that you need to give up or take portions of your other investments. This could include investments that may yield a lot more or alternative investment options, such as the following:
- Emergency funds
- Retirement funds
- Rainy day funds
- College savings
2. Homes don’t sell overnight
Even if you've paid off your mortgage in full, you must sell your home in order to liquidate it. That may happen quickly in today's market, but it's also important to know the four cycles that occur in the real estate industry. These cycles include periods of recession and recovery when sellers are compelled to keep their homes for longer periods of time due to uncertainty.
Plus, not all sales go through, which could make it even longer before you have the cash in hand.
3. Loss of tax savings
If you itemize your tax deductions, you’ll lose out on the tax write-off you get for the interest paid on your primary residence. If you must choose between paying off your mortgage and investing in a tax-advantaged retirement account, you also lose the tax deductions you’d receive for your contributions.
Investing – Advantages & Disadvantages
Now let’s look at the other side of whether you should pay off your mortgage or invest. If you aren’t paying your mortgage off, you should consider investing, but like all personal financial decisions, investing has its pros and cons too.
Advantages Of Investing
1. Potentially higher returns
In the invest vs payoff your mortgage debate, investing may provide higher returns. Keep in mind that there’s no guarantee. As you’ve likely seen in your lifetime, the stock market can crash at any given moment. But overall, the market has an annual return of 10%. Most mortgage rates are well below this number which means you’ll walk away with a higher return when you invest if you can invest for the long-term and not expect high returns overnight.
2. Investments can be liquid
Investments are liquid for the most part. For example, if you invest in the stock market, you can buy and sell stocks during the market’s hours. You don’t have to hold onto them for a certain amount of time. If you need money, you can sell your stocks.
Other investments may not be as liquid though, so always talk with your financial advisor to find out what’s liquid and what isn’t. For example, crowdfunded real estate investments often have an investment requirement of 5 – 10 years.
3. You may earn "free money"
If you’re able to invest in retirement rather than paying off your mortgage and your employer offers an employer match, you might get "free money" added to your retirement account. The contributions whether from you or your employer grow over time, leaving you with more money during retirement than you’d have if you chose to pay off your mortgage and not invest.
Disadvantages Of Investing
1. Higher risk
Like we said earlier, there’s never a guarantee of returns when you invest. In fact, to invest in stocks and not pay off your mortgage, you could lose everything. But, if you diversify your portfolio well enough, that might not happen. If you invest in conservative and aggressive investments, they should offset one another, leaving you with a decent average return.
2. You don’t own your home
If you choose to invest vs paying off your mortgage, the bank still owes a part of your home, and your home is the collateral. If you miss too many payments (usually 3-4), they can foreclose on your home and sell it.
The answer to whether should I pay off my mortgage or invest is "it depends". Choosing to pay off your mortgage or invest is a big decision. In a perfect world, you’ll be able to do both. If you must choose, weigh the pros and cons as they pertain to your situation. No two homeowners will have the same circumstances.
If you have no money saved for retirement or emergencies, make your minimum mortgage payments and invest vs paying off your mortgage. But if you’re set in other areas and just want to be out of debt, consider paying off your mortgage instead.
There’s no right or wrong answer. It’s what works best for you and your financial situation.