Should You Pay Off Your Mortgage Early or Invest?

by Ryan Guina

One of the most debated topics in personal finance is whether it makes more sense to pay your mortgage off early or invest extra cash. There are advantages and disadvantages to both options, and at the end of the day, there may not be one solution that is best for every situation. No matter which choice you make, to prepay your mortgage or invest extra money, you need to make a decision and then remain disciplined enough to continue your preferred course of action.

I will give you some advice on why you should or shouldn’t pay off your mortgage, and why you just need to choose what is best for you and your financial situation. So let’s get to it!

Why You Should NOT Pay off Your Mortgage

Should you pay off your mortgage earlyThe conventional wisdom is that you should pay off your mortgage as soon as you are able. In most cases, that makes abundant sense. But not everyone’s situation – or preference – is conventional, so you are not looking into paying off your mortgage, that is OK, and here are some reasons why that is OK!

Your Mortgage is Probably the Lowest Rate Debt You Have

This is never more true than it is right now, since we have record low interest rates. A 30 year fixed rate mortgage represents a unique opportunity to lock-in historically low rates – 3.something or 4.something –for decades.And if you look at interest rates over the past 30 years, you can easily appreciate that we may ever see rates this low again.

This is especially important if you have other types of loans at higher interest rates, especially credit cards and student loans. If you pay off any debt at all, you would be best to pay those off rather than your mortgage, since they typically carry much higher interest rates.

You’ll Pay off The Loan Eventually No Matter What

There’s a silver lining in choosing not to pay off your mortgage early –even if you don’t make any special effort, your mortgage will eventually be paid off anyway.This is because mortgages are set up to be self-amortizing – as you make your monthly payments, the principle is gradually reduced until the loan is completely extinguished at the end of the term.

The point is, even if you accumulate cash, invest in other assets, or pay off non-housing debts, your mortgage will still end up being paid off!

If you decide to invest extra savings in places other than your mortgage, just be sure that you don’t add to your mortgage indebtedness. That means avoiding second mortgages and home equity lines of credit. It also means not taking any additional cash out in the event that you refinance your first mortgage.

Paying off your mortgage early may be good for a lot of people, but not paying it off early can also work for a lot of people. You may be someone who will find that your financial interests be better served by not paying off your mortgage. Carefully consider the alternatives, no matter which way you decide to go.

Disadvantages of Paying Off Mortgage Early

While paying your mortgage off early gives you peace of mind and interest savings, the argument from people who think investing is a better use of extra money is that mortgage interest rates are usually quite low. A portion of your mortgage payments are also tax deductible if you itemize your tax return, which means paying off your mortgage early may not be as advantageous as it seems at first glance.

Advantages of Paying Off Mortgage Early

The primary reason most people pay the mortgage off early is for the peace of mind that comes from knowing the house is completely paid for. Being debt free is one of the most important steps in becoming financially free. Plus if you are paying anything like PMI or Mortgage Life Insurance, then paying your mortgage off early will save you this money each month.

If you are at a point in your life where you looking into real ways to pay off your mortgage early, then I have some great advice on ways to help that won’t be such a big shock to the wallet!

Refinance to a Mortgage with a Shorter Term

With mortgage rates currently in the 4.something range, this can be the simplest way to retire your mortgage early. The idea is to refinance your loan, but reduce the term by at least five or 10 years. By doing so, you can convert a 30-year mortgage to a 25-year loan, or even a 20-year term.

As simple as this method is, there are some caveats to be aware of should you decide to go this route:

  • You don’t want to refinance if it will result in an increase in your interest rate of something on the order of one percent or more. There’s a point where a higher rate will offset the benefits of a shorter term.
  • You don’t want to add closing costs to the new loan balance – doing so will only increase your monthly payments, and make paying off the loan more difficult.
  • The term reduction must be based on the number of years remaining on your mortgage as of today. For example, if you are three years into a 30-year mortgage (meaning you have 27 years remaining on the term), and you want to reduce the term to that of a 20 year loan, you’ll have to refinance the new mortgage as a 17 year loan.

Keep each of these points in mind should you decide to do a term reduction refinance. Also, it’s probably not worth refinancing if you expect that you will be moving out of the house in less than five years.

Set up a Bi-weekly Payment Plan with Your Mortgage Holder

With a biweekly mortgage payment, you will make your house payment every two weeks, rather than once a month. At first glance it doesn’t seem as if that will make much difference. But it actually has the effect of making you pay the equivalent of one extra monthly payment per year. And that difference in the annual payment can chop several years off the remaining term of your loan.

Make One Extra Mortgage Payment Each Year

But there’s an easier way to get the benefit of the biweekly mortgage, without having to refinance your current mortgage into one.You can simply make one extra mortgage payment each year, and that will achieve the same result.

There are different ways that you can make a 13th payment each year, but the least noticeable will simply be to allocate extra money into a dedicated savings account –kind of like an emergency fund, but one set up for the specific purpose of making an extra payment on your mortgage each year.

Apply Cash Windfalls to Your Mortgage Balance

This can be the most effective fast-payment method you can use to pay off your mortgage early. That’s because you don’t have to save up for it, you don’t have to increase your monthly payment, and you don’t have to refinance your mortgage.You simply take any extra money you have and apply toward your mortgage balance.Your regular monthly budget will never be disturbed.

There are probably more opportunities to do this than you are generally aware of. The most obvious is using your income tax refund for this purpose. According to the IRS, the average tax refund is around $3,000. If your refund tends to be in that average range, that will be a more effective way of paying off your mortgage than making extra mortgage payments, or even increasing your monthly payment.

But there is another great benefit of paying your mortgage off early. When you prepay a mortgage, you can save tens of thousands of dollars in interest. Once paid off, you also have extra money each month that you would have sent to your mortgage otherwise. You can then use the mortgage payment to invest.

Advantages of Investing

Because mortgage interest rates are usually comparatively low, it may be better to use extra money toward investments that have a potential for larger returns. When you use the money to pay extra on the mortgage, you give up investment returns that are probably going to be higher than the interest you’re saving by paying the mortgage early. For example, if your mortgage is charging 5% fixed interest over the life of the loan, and you could earn 8 to 10% returns on money invested, obviously the money is better used on investments than paying the mortgage early.

Where to start. Don’t know where to start investing? Here are some of the best companies to open an IRA. Here are some beginner investment strategies.

Disadvantages of Investing

There are no guaranteed returns when you invest money. You can only assume the average return, but you might find you expected an 8% return on your investments only to earn 4% – in which case you may have been better off paying your fixed-interest mortgage off early instead of investing.

A Blended Approach May Work

If you have extra money, you can use both approaches. For example, my wife and I round our mortgage payment up to the nearest $100. Our mortgage ends in the twenties, so we send over $70 extra per month toward the principal. We have been doing this for over 4 years now and have cut thousands of dollars off our principal and several years from our repayment schedule. The difference is small enough that we don’t notice it on a monthly basis, and still allows us to max out our IRA contributions, make 401-k contributions, and have a little fun money.

Discipline and Consistency is Key

Regardless of which you choose to do, the issue many people face when deciding to use extra money to invest rather than paying off their mortgage early, or to use your extra money to pay the mortgage off early – is a lack of discipline. If you decide to invest the extra money but don’t stick to the plan, now you’ve wasted money you could have used for paying off the mortgage early – or money you could have used for investing in your future.

Published or updated October 19, 2016.
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{ 26 comments… read them below or add one }

1 myfinancialobjectives

Hmm, I would have to go with paying off the mortgage. I personally HATE having debt hang over my head. The same concept applied to Dave Ramsey’s Debt Snowball. It may not make mathematical sense to pay it off, but it’s a psychological feat as well. As long as I have at least 12% of my paycheck going towards my 401K, I’m contributing to my IRA, I have an emergency fund set up, and I have a savings system set up, I am going to start some serious extra payments on my mortgage. That sounds like a lot of things to have in place, but for me, I feel that they are necessary to a secure future.


2 Ryan

Wow, that’s a lot of conditions! LOL. It sounds like you fall into the “invest first” camp, then prepay the mortgage once you are investing “x” dollars per month. 😉

I think a hybrid approach is a great way to go. It’s important to invest for the future, and it is important to eliminate debt early.


3 myfinancialobjectives

Haha, yeah I guess you are right, that is quite a few conditions:) I guess my method is a hybrid approach, I’m saving for the future, not taking on any additional debt, and paying off additional debt!


4 Financial Samurai

Question… if you say “I save 20% of my gross salary”, does that include contributions to your 401K and IRA, or is that in addition to those contributions?

Just want to clarify what people’s default settings are. Whatever savings rate I state, does not include 401k. And, apparently, not everybody classifies savings the way i do.


5 KellyB

I am doing the hybrid approach currently I suppose. I am maxing 401k, IRA, catch up contributions, as well as some savings for my 3rd son’s college. My plan is to also put $10K per year extra toward the mortgage, and I am doing this by sending $2500 quarterly to the principle. This should presumably cut my 14 year $140K remaining mortgage in half, paying off in 7 years. It is exciting to see the mortgage balance finally starting to move a bit quicker than it has been. (BTW, I refinanced an original 30 year loan to 20 years, paid normally down to 14, and am now trying to accelerate). Really looking forward to paying off as soon as I can!


6 Ryan

Awesome job, Kelly! 🙂


7 Greg McFarlane

Ryan – I like your idea of taking extra money you have lying around and applying it to your balance. I only wonder how much more time you’d cut off your obligation if you put some structure to it. You can make additional payments while stipulating that your lender apply the extra money only to the principal.


8 Ryan

Greg, It’s fairly easy to determine how much time and money you would save if you can make regular contributions – just use a mortgage calculator and run the amortization schedule. Most calculators have an input for extra payments. It isn’t as easy to calculate if you make irregular payments, but you can at least get an idea of how much time and money you would save.

Some people take this a step further and apply every extra bit of money they can find toward their mortgage, dramatically decreasing the amount of time it takes to repay it. The key is finding something that works for you.


9 Greg McFarlane

Thanks. My point was (is) that by applying the extra money only to the principal, you’ll reduce your obligation more quickly than if you don’t specify that the money is to go only to the principal. Of course, that depends on what your lender’s willing to take and the details of your mortgage.

Either way, paying extra is a far saner way to eventually get to 100% equity than refinancing or getting into an exotic non-fixed rate mortgage are.


10 basicmoneytips

After watching the stock market for the last decade, pay your house off. Even though mortgage rates are low, I am betting most people are not earning over 4-5 percent on investments. In fact, most people are probably underwater if you look at the last 10 years.

Plus at the end of the day, paying down debt is never a bad thing.


11 WR

Even if you have a low mortgage interest rate, paying off your loan is an instant, guaranteed 4-6% return on your investment. Much better than many other investment options.

It is important to look at your tax-free/ tax deferred investment options first .

some additional thoughts:
1. While you are working toward having the house paid off, your 6 month contingency fund needs to be fully funded. (you can still get foreclosed on even if you prepay principle for years). No one know what their future holds. be prepared.
2. Prepayment can drastically shorten the life of your mortgage and success breeds success. As you see the principal drop, you are more inclined to throw more money at it. a 25% extra payment can cut a 30 year loan just about in half.
3. There are few things in a persons financial life that are better that that of owning a home free and clear. I have heard the arguments that ‘sophisticated’ investors know that cashflow is king and that mortgage prepayment is just fear-based risk aversion. I would argue that they are right! moderate prepayments will not hinder cash flow all that much and fear of risk is not always a bad thing.
4. With the ‘extra’ money you have each month that would have been your mortgage payment you have until Dec 31st to max out your 401k and april 15th of the following year for your IRAs.



12 ColdCache

I agree with basicmoneytips. Not only are people not earning 4-5% on their investments, it’s NOT a guaranteed return. There is risk involved. Paying down the mortgage is a guaranteed return, and that is hard to beat. The S&P 500 has been flat for the last 10 years… who knows what lies ahead.


13 Johnny V

We have been accelarating our mortgage payment and our house should be paid for by March 2012. I prepare my own taxes and since the house is almost paid for the interest payments for our mortgage is less than 10k this equates to ZERO tax advantage, I don’t get a penny back from uncle sam in credit when I enter the mortgage interest on my tax software.

Since there is no real advantage for us carrying our mortage I might just payoff the whole thing early next year and save between 6-8k in mortgage interest.

Peace of mind is definitely our main priority.

Something to think about: If you paid 20k in mortgage interest and you get back 5k in tax credit, you are still in the hole for 15k 😉 And they call this tax advantage :-O


14 Ryan

I would probably pay it off too, if I were that close. Just be sure you’ve got enough cash on hand to handle any emergencies. And congratulations! 🙂


15 Naylor

My dilemma is whether to pay down a fixed-rate 6.47% primary mortgage (nearly $300,000) or a variable-rate 3.24% HELOC with balance of nearly $30,000 (which has been at 3.24% for nearly 3 yrs. I have no other debt (pay off credit cards each month, and no car loans, etc.)


16 Kevin


We re-financed in 2003 to a 15-year mortgage and currently have a balance of $66. We can easily afford to pay it off right now while still having considerable investments. Due to the differing opinions on the subject, we’re not sure whether we should pay off the mortgage or not.



17 Ryan

Kevin, I’m assuming you mean $66k, otherwise I’m sure you would have paid off the balance already! It’s hard to answer your question based on the amount of information you have in this comment, but here are a few things to think about: Should You Pay Off Your Mortgage Early?. You can use those questions, and any others that apply to your specific situation to help make your decision. IN the end, it’s all about what you are comfortable with. Best of luck!


18 Financial Samurai

I’d pay off the sixty six bucks for sure and then go to Vegas and pet the $66 on black!


19 alfredo hurtado

We just bought a $287.500 1BD CoOp and put down 20% ($57.500.00) fir which I used $28,750.00 in cash savings and took a $29.000.00 401K loan. We got a 4.25% fixed mortgage rate on the $230.000.00. Are we better off making addtl mortgage payments or, investing surplus in mutual funds? I am 51 and suppose I’ll be working for 20 yrs. more to pay mortgage. Also, I have 15 years to pay for the 401K loan which scares me more if I ever lose my job. There are no penalties for paying either mortgage or 401k loan sooner.

Thanks Alfie


20 Ryan

Alfie, I would consider using surplus funds to repay your 401k loan early. If you leave your job early for any reason, your loan is due in full. If you aren’t able to pay it off immediately when you leave your job, it could be considered an early withdrawal which would result in a 10% early withdrawal penalty and taxes on the amount withdrawn.


21 Alfie

@ Ryan…..Ryan, did you mean to pay off my actual mortgage loan (Wells fargo) or the 401k plan loan (Fidelity) which I used to compelte my down payment? Thanks Alfie


22 Ryan

Alfie, I meant to write repay the 401k loan early… that was a typo on my part. It’s a good idea to understand the possible ramifications of taking a loan from 401k Plan. If you leave your job before the loan is repaid, the entire loan balance is due immediately. What ever you can’t repay is subject to an early withdrawal penalty if you are under the age 59 1/2, and you will also have to pay taxes on that same amount. It could prove to be costly, which is why I would recommend paying that loan before focusing on repaying other loans. It will also give you the chance to continue growing your retirement savings.

23 WR

Before paying anything back early, I would make sure I had at least 9-12 months of contingency fund built up. you’ll lose some interest but gain huge amounts of breathing room. Not sure what industry you are in but having a cash cushion is becoming crucial for just about everyone.


24 Alfie

@WR…I have about 4 months of mortage payment, maintenance plus a little extra to pay my 401k plan loan…I I am guessing u meant 9-12 months of equal salary pay, right?


25 Ryan

Very solid advice.


26 WR

A Contingency fund is based on the monthly expenses you expect to have if you are no longer employed.

If you lose a job the cost of lunches, commuting, dry cleaning and day care could go away while the cost of health insurance and job hunting would increase. Your mileage may vary.

A good rule of thumb is to make sure you replace 80% of your income for 6 months.

I would not even consider investing in stocks until I had 6 months under my belt. The purpose of any investment is to bring a future return. This is much less likely if you have to pull out at the slightest sign of difficulty or when the stock market tanks. If you are unemployed, it would be almost impossible to watch your assets plunge 50% without freaking out. It is the freaking out (and selling low) that causes the most heartache.

In short, make sure you have the financial backbone to weather short term fluctuations.

Sometimes, while building wealth, it is advisable for people to keep their money ‘under the mattress’. Stock and bond markets are increasingly volatile and gold is almost $2,000 an ounce. This is not a bad thing. If things seem freaky, just put your money in the bank. Building the habit of saving is the most powerful habit you could imagine.

If you have credit card or consumer debt you should be paying 30% of your income in reducing that. Debt is the slavery of the free.

If you are on the road to eliminating consumer debt then my advice is to ignore CNN and MSNBC. Put 20% of everything you earn in an FDIC bank account until that amount reaches 6 months of YOUR family’s living expenses.

Then, max out your 401(k) at work by putting 60% in a Broad based stock index fund and 40% in a broad based bond index fund.

At the end of the day, remember this: Habits are more valuable than money.

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