Should I pay off my mortgage or invest?

Many people view debt as the financial enemy and strive to pay it down as quickly as possible. While the strategy can be wise for high-interest obligations like credit card balances, you may find that when it comes to mortgages, the math isn’t as clear-cut. You might be better off putting available funds toward investing, some experts say, while others believe it’s better to unload your debt, then focus on investments. As you weigh your options, here’s what to consider.

Should I pay off my mortgage or invest?

While paying down your mortgage ahead of schedule may be of financial benefit, this will depend on your interest rate and market conditions. You may find that your returns on new investments will exceed any cost savings you could stand to gain by paying down your mortgage balance.

Unlike other types of loans, mortgages are considered “good” debt because they’re tied to an asset — your home — that typically appreciates over time. Because of this, some financial advisors believe you should leverage your mortgage rather than eliminate it. Take out that 30-year loan, keep it for as long as possible and devote extra cash flow to investments or other goals.

“Mortgages are the cheapest money anybody could ever borrow,” says Claire Mork, director of Financial Planning at Denver-based Edelman Financial Engines. “I think of it as a financial tool.”

Not everyone agrees with that approach. Chris Hogan, a Nashville-based consultant and author of “Everyday Millionaires,” advises clients and audiences to pay down their mortgages as quickly as possible.

“I’m allergic to debt,” says Hogan. “I see debt as a threat.”

Both strategies are viable in theory, says Ken H. Johnson, a housing economist at Florida Atlantic University.

“The average person has to fall back to, ‘What is my tolerance for risk?’” says Johnson. “It’s well-established in academic research that different people have different tolerances for risk.”

Risk tolerance is your ability to stomach ebbs and flows in the market, or more directly, your willingness to endure loss.

If you can reach your financial goals while continuing to invest, doing so might be the best decision. Conversely, if you absolutely need your assets to remain intact, real estate is traditionally a more stable place to keep equity.

Then there’s the bigger economic picture to consider: Mortgages aren’t as cheap as they were in 2020 and 2021 — interest rates have, in some cases, more than doubled.

“If someone has a [mortgage] rate of 6 or 7 percent, that’s about the average return we count on in a moderate-risk portfolio,” says Mork.

Factors to consider when deciding whether to invest or pay off a mortgage

When you’re wondering if it’s better to pay off your mortgage or invest, consider your answers to the following questions:

• Do I have sufficient emergency savings? Conventional wisdom advises that consumers save up between three and six months’ worth of living expenses to cover costs during an emergency or income interruption. Your answer to this question will depend on your risk tolerance, capacity to save and existing financial obligations.
• Am I putting away enough for retirement? As with emergency savings, expert stances vary on how much you should have saved up for retirement by different ages and stages of your career. You may look ahead to which withdrawal strategy you plan to use down the road to decide how much you should be saving now.
• How much other debt do I carry? Assessing your complete financial picture is key when determining your debt payoff priorities. Identifying which debts you should pay down first can help you to save on interest, maximize your investment potential and balance responsibilities.
• What are my prospects for increasing my income? Whether this involves asking for a raise at work or picking up a side hustle, your prospects for increasing income are another consideration in deciding whether to focus on investments or paying down your mortgage first.
• What moves am I looking to make in the next year? In the next five years? Be sure to assess housing market conditions before making any decisions. Prepaying your mortgage can come with pros, like eliminating private mortgage insurance (PMI). But you may also encounter some cons, such as penalties for paying the debt off ahead of schedule. Keep mortgage amortization front-of-mind, too. An amortization calculator can help you see how much of your monthly payment is going toward the loan’s principal versus interest. If you’re midway into your loan term and making significant headway, you may choose to stay put and build equity while you invest.
• How does my mortgage rate compare to expected portfolio returns? Monitor your investment portfolio, assessing both near- and long-term return rates. A good benchmark to use in this situation is the S&P 500, which has historical returns of 10 percent on average annually. If your investment returns outpace the national average mortgage interest rate, consider keeping your current mortgage and accelerating your investments.

Strategy 1: Pay off your mortgage

Pros

• Paying off your mortgage eliminates a large monthly expense, providing more cash flow.
• The sooner you pay off your mortgage, the less interest you’ll pay overall.
• Your credit score tends to go up as you pay down debt, so paying off your mortgage might boost it.

Cons

• If you put all your excess cash into your mortgage, you’re tying it up in an illiquid asset. You won’t be able to access that equity unless you take out a second mortgage, do a cash-out refinance or sell the home.
• You’ll lose the ability to take the mortgage interest deduction.
• Housing appreciates at a lower rate overall than the stock market over time.

As Hogan interviewed millionaires for his most recent book, he discovered a common theme: Many paid off their mortgages early or as quickly as they could instead of holding onto the loans to term.

If you decide to take this route, Hogan advises putting 15 percent of your income toward retirement savings and using extra cash to trim mortgage debt. If you must have a mortgage, he suggests taking a 15-year loan to get rid of the debt faster and pay far less in interest.

Strategy 2: Keep your mortgage and invest

Pros

• The stock market has historically returned an average of about 10 percent. While performance isn’t a sure thing, if your mortgage rate is less than 10 percent, you could come out ahead by investing.
• Stocks, bonds, mutual funds and ETFs are highly liquid, meaning you can sell them easily and use the cash for other purposes.
• If you put money into a retirement account, you might be able to take advantage of perks like employer matching and tax breaks.

Cons

• Stocks are volatile and there are no guarantees. A bad year or two could put a big dent in your portfolio.
• For many people, their mortgage payment is their biggest monthly expense. If you invest instead of paying the loan off, you’ll still have to make that payment.

A 30-year mortgage comes with pros and cons. On the upside, the payments are low (that’s especially true if you managed to refinance to a very low rate in 2020 or 2021), so there’s little urgency to pay down the debt. On the downside, you’ll pay a lot in interest over the life of the loan.

Still, you could be sacrificing an opportunity to build retirement wealth.

People “feel like they have to pay off the house before they retire,” says Mork. “That’s not always the case.”

How these homeowners made the decision

Morgan Housel is a Wall Street pro and author of the book “The Psychology of Money.” Housel and his wife carry no mortgage on their home — a money move he acknowledges is irrational.

“On paper, it’s the dumbest thing you could possibly do,” says Housel. “Even though it’s the worst financial decision we’ve ever made, I think it’s the best money decision we’ve ever made. It’s one thing that gives us a level of independence and autonomy.”

Housel admits they didn’t behave logically on this front — but that sometimes peace of mind wins out. He and his wife actually celebrated when they paid off their mortgage.

“When we did it, it was like, high five, hug each other, this is so cool,” says Housel.

The lesson, says Housel: Maximizing every penny of returns can be emotionally exhausting.

“People should not just aim to be rational on a spreadsheet — rational on paper, I think, is not a good financial goal,” says Housel. “People should aim to be reasonable and manage their own financial decisions about what makes them happy, and what helps them sleep at night.”

Frequently asked questions

• Does paying off your mortgage early hurt your credit score?

  Paying off your mortgage does not have a drastic effect on your credit score, according to Experian, one of the three national credit bureaus. However, if you do not get another mortgage by the time your paid-off mortgage account drops off your credit history (after ten years), you might see your score dip slightly from the reduced credit mix and length of your accounts.
  

• What are the best ways to invest extra cash?

  While paying extra toward your mortgage principal may be a solid move, remember that investment options come in many forms. From college saving plans to brokerage accounts, there are many ways to earn interest while pursuing financial goals outside of paying down your mortgage.
  
  
  In addition, investor Warren Buffet has long advised investors to purchase an S&P 500 index fund and keep it over time. Connecting with a financial advisor can help you align your objectives with the most impactful investment options.