Should You Pay Off Your Mortgage Early or Invest?

Debt often has a negative connotation, but many times, borrowing money is a smart move, such as if you’re getting a loan for college or a mortgage. So, if debt doesn’t automatically qualify as a bad thing, does it make sense to pay off your mortgage as soon as possible? Today, we’ll explore the pros and cons of paying off your mortgage early or using your extra cash to contribute to an investment account. Remember, a house is the largest purchase most of us will make in our lives—which can lead to emotional decision-making.

If you need assistance with your finances, work with a professional financial advisor from Good Life Financial Advisors of Mt. Pleasant. We’re ready to help create a personalized plan for your specific needs.

Pros of Paying off Your Mortgage Early

Explore the pros of paying off your mortgage early:

Freedom from Mortgage Debt

The first pro of paying off your mortgage early is the most obvious one—you’ll completely own your home. This not only means that a huge monthly expense will come off your bank statement, but so will the interest you’re paying the bank for the mortgage. Even though mortgage rates are low compared to other types of borrowing, interest payments still eat into the appreciation value of your home. So by paying off your mortgage early, you increase personal cash flow AND free yourself from the adverse effects of compound interest.

Stability and Satisfaction of Ownership

Getting out of debt is always a cause of celebration, but paying off a mortgage is even more special. You now own your home, a dream many Americans have but never get to experience. Owning a home means your house is now truly an asset that you can tap for cash through a vehicle like a home equity line of credit (HELOC). But owning your home also provides you with stability—even if your home declines in value, you won’t have to worry about being underwater on a mortgage, nor will you be affected by fluctuations in the market.

Cons of Paying off Your Mortgage Early

Explore the cons of paying off your mortgage early:

Mortgage Rates Are Historically Low

Mortgage debt usually comes with lower rates than most other forms of debt, but recently, mortgage rates have reached historic lows—and they may have even further to fall. With rates as low as 3%, the interest you’re paying to the mortgage lender is far more fair than the interest you pay to credit card companies or personal loan providers.

Opportunity Costs

When you pay off your mortgage early, you have to deal with trade-offs. Paying extra on your mortgage might get you out of debt sooner, but you also won’t have that extra cash to invest, save for emergencies, or put away for future college costs of children. Unless you’ve found a way to increase your income, you’ll have to spend less elsewhere to pay more towards your mortgage.

Pros of Investing First

Explore the pros of investing your money first before paying off your mortgage:

Stocks Have Provided Great Returns

Mortgage rates are hovering around 3% – 3.5%, which means a certain amount of each housing payment goes strictly to servicing the debt. However, stocks have traditionally returned between 6% and 10% annually. Even a bearish outlook on stocks would still project returns north of the average interest rate, so investing in stocks while paying off your mortgage on time is likely to have a more positive effect on your net worth. (Keyword: “likely”)

Your Mortgage Rate May Not Outpace Inflation

If you have a 30-year fixed rate mortgage, you’ll be paying the same interest rate on your home for three decades, unless you refinance at an even lower rate. If you expect inflation to rise over the next 30 years, your mortgage rate may stay below cost of living increases and the mortgage payments you make to the bank no longer have the same purchasing power—their loss, not yours.

Cons of Investing First

Explore the cons of investing your money first before paying off your mortgage:

Unpredictability

Sure, stocks have provided on average returns that surpass the rate banks earn on mortgage loans. In most cases, buying stocks will provide you with more purchasing power than an early mortgage payoff. But the italicized words here obviously hold the key—there’s always the chance stocks underperform and you’ll face regrets if your mortgage rate outpaces your market returns.

Timing

Investing in stocks always leaves you susceptible to a market correction, or even a crash. Housing prices have declined in the past, but never to the levels we’ve seen the stock market fall in 2008 and 2020. What if you needed funds for an emergency during a market correction? You won’t have time to wait for the market to right itself and may have to sell stocks at a loss to cover expenses.

Work With an Experienced Financial Advisor

Whether you should pay off your mortgage early or invest primarily depends on your personal financial situation. Young investors should be aggressive since time is on their side and mortgage rates are at historic lows. But if you’re approaching retirement, already have stock holdings, or simply desire to live a debt-free existence, paying off your mortgage might make sense. Before making any big decisions, be sure to consult with a financial advisor from Good Life Financial Advisors of Mt. Pleasant!