Should I Pay Off My Mortgage Early or Invest?

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Whenever we write about paying off our mortgage early, we always seem to ruffle some feathers.

For those who don’t know, we recently paid off the 15-year mortgage on our primary residence about 7 years early. (Side note: Here’s how we also earned credit card rewards for doing it.) We’ve also paid off the mortgage on one of our rental properties well ahead of schedule.

So, yes, we believe paying off your mortgage early works.

With that said, this conversation always brings out some pretty strong opinions. While we believe prepaying your mortgage is typically an excellent strategy for most people, most of the time, it’s true that it’s not the right call for all situations.

So, should you pay off your mortgage early? Let’s take a look at some of the pros and cons of this effective but controversial strategy.

Paying Off Your Mortgage Early: The Pros

Be honest: How often do you hear somebody say, “Man, I wish I wouldn’t have paid off my house?”

Almost never, right?

There’s a reason for that.

If you’re like most people, your monthly mortgage payment is likely your family’s largest expense. Whether you realize it or not, that debt hangs over every aspect of your financial life. Those giant payments suffocate your ability to use the money you already have to get what you really want. Every month, a huge part of your paycheck is already spoken for – restricting your cash flow and affecting your ability to make other important financial decisions.

What could you do if you didn’t have to shell out thousands a year in mortgage payments? What could you prioritize now that you can’t now because of your mortgage? It would be amazing, right?!?

By putting extra money toward your mortgage and paying it off early, you’ll free up your cash flow quicker – sometimes decades faster. Then, you can use the extra money to invest more, travel more, and basically do all the things you’ve wanted to do…and you can pay for them all in cash.

Additionally, by paying off your house early, you’re essentially “making” a guaranteed interest rate. For example, if your mortgage rate sits at 4%, every extra dollar you pay saves you 4% in interest. The result is effectively the same as if you made 4% in the bank – you have 4% more money. In my opinion, and in most cases, it is one of the best low risk investments you can make.

Paying off your mortgage early is also a great security blanket. In our case, once we paid off our mortgage, the only bills we have to worry about now are a few hundred bucks in monthly utilities and food costs. In a worst-case scenario where we lost all of our income, we’d likely be able to keep our house because it’s already paid for. All we have to do is scrape up a few hundred dollars to meet our monthly expenses.

Chances are good that you already have the money to pay extra toward your mortgage. If you haven’t done this already, learn how to budget and start tracking your monthly spending. You’ll quickly identify areas where you’re spending hundreds (possibly thousands) of dollars a month that you could easily put toward your mortgage instead.

Don’t know how to track your spending? Here’s a guide to getting started.

Paying Off Your Mortgage: The Emotional Component

One thing that routinely gets overlooked during this debate is the emotional component. Frankly, I think this is huge.

First, debt can be a giant burden on you emotionally. When you live with debt, you have to work harder and longer because part of your paycheck is already spoken for. It sucks, and it weighs on us more than we realize.

But, that’s not all.

Americans are addicted to debt. In fact, many of us just assume we’ll be in debt for the rest of our lives. So, instead of working toward paying it off, we end up accruing more and more debt. We keep piling it on, never planning to have it fully paid off, making our financial lives more difficult because of it.

This is exceptionally apparent when it comes to houses. If you never plan to pay off your mortgage, there’s a good chance you’ll borrow more than you can really afford and make yourself house poor. And, while you’re at it, there’s a pretty decent chance you’ll pay for part of it twice, borrowing even more through a home equity loan along the way.

Why not, right? You’re gonna pay on it the rest of your life anyway.

This is the type of thinking that continues to perpetuate the debt cycle…and it doesn’t stop with your house. It spills over into cars, furniture, student loans – really, every facet of your life.

The thing is, it doesn’t have to be this way. You can live without debt, and – frankly – it feels great. I know because I’ve done it.

If your goal is to pay off your house early, you’ll likely spend less when you buy it. And, once you do pay it off, you’re less likely to trade up or suck your equity out of it through another loan.

By simply believing that a debt-free life is possible (and it is), you could end up saving hundreds of thousands across the board.

Why You Shouldn’t Pay Off Your House Early

Clearly, we believe paying off your mortgage early is a good thing for most people. But, there are definitely other arguments to consider before jumping in full force.

The biggest argument against paying off your house early boils down to this: Typically, you’ll make more if you invest the extra money into the stock market.

Keep in mind, this line is often thrown out by somebody who wants to sell you investment products. After all, nobody benefits from you paying off your house early except you. Still, this line of thinking does bear consideration.

You’ll often hear that the stock market has averaged an annual growth rate of about 9-10% over the last 100 years. While this is technically true, it’s a bit misleading. Compound annual growth rate (CAGR) is a significantly better metric to measure market growth, and that sits at roughly 6.5% when adjusted for inflation.

So, if your current mortgage sits at 4% interest, the extra money you throw at your mortgage would likely average 2.5% more in the stock market than what you’d save in interest. That may not seem like a lot, but when compounded over a long period of time, that could mean tens of thousands of dollars in opportunity cost. On the other hand, since stock market gains aren’t guaranteed, a significant market downturn during that same time could mean paying off your mortgage early was the better play.

As you might suspect, I generally don’t buy this argument. Would you take out a loan so that you could invest it in the market? Most people probably wouldn’t, but that is essentially what this position advocates. Keep in mind, also, that investing in the market is not guaranteed to produce positive returns. Paying off your mortgage early guarantees that you’ll save that money in interest.

Additionally, most people fail to “invest the rest.” Instead, they’re hit with a double whammy: They don’t save on interest, AND they use the extra money to buy stuff they don’t need or really want. They continue to believe they’ll never get out of debt, so they keep piling it on – making their situation worse with every dollar they borrow.

Dealing with High Housing Prices

Admittedly, though, paying off your house early works better for those of us who live where housing prices are cheaper.

Here in the Midwest, we bought our 2,200 square foot house for just under $190,000. It’s now worth about $250,000. However, this same house, on the same size lot, in a similar neighborhood located in Southern California would likely cost over $1,000,000.

Obviously, it’s a lot easier for me to pay off $250,000 quickly than it is to pay off a $1 million loan. It also takes less cash to do it.

Mortgage payments this large could already make it difficult to meet other financial goals, particularly when it comes to retirement. As you probably know, the earlier you start investing, the more compound interest can work its magic. In this case, it’s a good idea to be sure you’re saving enough for retirement before you start paying extra toward your mortgage.

So, if you live in an area where the cost of living is high, think carefully before pouring all of your extra money into your mortgage. In this situation, it may not be the best decision for you financially.

When You Should Pay Off Your Mortgage Early

• You live in an area with low to moderate housing prices
• You don’t have plans on moving for at least 10 years
• You are contributing 15% to 20% of your income toward retirement
• The interest rate on your mortgage is high

When Paying Off Your House Early May Be a Bad Idea

• You live in an area where housing prices are extremely high
• You aren’t contributing enough to your retirement account
• Your mortgage has an exceptionally low interest rate
• You have plans to move or move often due to your job

Final Thoughts: Should You Pay Off Your Mortgage Early?

So, is paying off your house early always a good idea? In most cases, I believe it is. But, like many things with personal finance, the answer isn’t always cut and dry.

If you own a home in an area where housing prices are more moderate, there’s a good chance that you can start investing a substantial amount in your retirement accounts and pay off your house early. By identifying areas where you can use your money more efficiently, you’ll likely be able to free up the cash to do both.

On the other hand, if you’re living on one of the coasts, there’s a good chance that paying off your home early could cost you tens of thousands in opportunity costs. While it’s still important to find areas to be more efficient with your money, the fact is that paying extra toward your mortgage could considerably strain your ability to invest in your future. If this is the case for you, carefully consider your options before making a decision on how to proceed.

What do you think about paying off your mortgage early? Have you done it? Let us know in the comments!