Pay Off Mortgage or Invest?

Pay Off Mortgage or Invest?

Today we answer the popular question: Is it better to pay off your mortgage or invest the money?

The answer is—it depends.

At Adviser Investments, we’re big advocates for paying down debt, especially as you near retirement—you’ll have a greater chance of prolonging your retirement income without debt.

When making the decision to invest versus paying off your mortgage, it’s important to consider two key factors, specifically:

#1 – Financial Impact

#2 – Emotional Impact

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Financial Impact of Paying Off Your Mortgage or Investing

Making the decision to pay off your mortgage versus investing extra savings is a straightforward financial decision, since the answer is whatever the math says, right?

Not necessarily.

If you have extra money, you should also consider the following financial moves:

  • Applying extra savings to catch-up contributions. If you have the cash flow to max out your retirement accounts in your 50s and to make catch-up contributions on top of that, we highly recommend it. In 2023, anyone over 50 can contribute an additional $1,000 to an IRA and an additional $7,500 to workplace retirement plans.
  • Ensuring you have a solid emergency fund, a cornerstone of any strong financial foundation. We recommend setting aside enough to cover six months of expenses. (Discover practical saving approaches. Read our post, Emergency Fund Fundamentals.)
  • Forecasting your short- and long-term cash needs. For example, if you pay off your house, that’s money you may need later—leaving you with less financially liquid options.
  • Optimizing employer tax-deferred accounts. It’s often a smart financial move to max-out your employer’s 401(k) rather than pay off your mortgage, given the tax benefits and employer match.
  • Paying off higher interest loans, like credit cards.
A couple considers whether to pay off their mortgage or invest and listen to the advice of their financial adviser.

Is it better to pay off your mortgage or invest the money?

The answer is not as straightforward as it would seem, given the diverse alternative savings approaches and debt reduction prioritization considerations.

Tip: Since you’re contemplating your mortgage, understand Reverse Mortgages—Myths Versus Reality. Keep your options open.

EXAMPLE: Paying Off Mortgage vs. Investing

Here’s a simple example for deciding whether to invest or pay off your mortgage.

According to ValuePenguin, “By December 2020, the 30-year mortgage rate plummeted to a new historical low of 2.68%. Rates spent most of 2021 between 2.70% and 3.10%, giving many borrowers an opportunity to refinance or buy homes at the lowest rates ever recorded.”

A homeowner proudly shows off his home, having benefitted from a low mortgage rate.

Given the above trends, let’s use a 3% mortgage interest rate, since it’s likely you either had a great rate to begin with or refinanced while rates were low, and an average 10% annual stock market return over time. (In reality, it’s more like 7% over time after inflation, and past performance is no guarantee of future results.)

By earning a 7% annual investment return compared to paying off a 3% mortgage interest rate, you earn 4% more by investing your money in the stock market. However, and this is a big “however,” there are no investing return guarantees, and these numbers don’t account for taxes on investments or mortgage interest deductions.

Calculator Resource: Here’s a handy pay-off-mortgage-vs-invest calculator, providing you an initial look at your financial situation.

The ultimate answer to “pay off mortgage or invest” is a holistic one; specifically, reviewing every component of your financial life coupled with your long-term goals.

Tip: We often advise clients to pay off the mortgage on their primary home before buying a second property, even if they plan on renting it out. Understand why by reading our post, Buying a Second Home: Is It Time?

Emotional Impact of Paying Off Your Mortgage or Investing

Having little to no debt lowers stress and, therefore, is a valid reason for paying off your mortgage.

A homeowner relaxes in her home, benefitting from the significant emotional impact of paying off her mortgage rather than investing.

According to the American Psychological Association’s 2022 Annual Stress in America™ survey, “The proportion of adults who noted money as a source of stress (65%) was up significantly from the Stress in America surveys in June (61%) and February (57%) 2021. Similarly, the number of adults who noted the economy as a significant source of stress (65%) has risen significantly from the Stress in America surveys in August (59%) and June (58%). Half of all U.S. adults (50%) indicated housing costs as a significant stressor, which is up from February 2021 (46%).”

There are also other emotionally uplifting advantages to paying off your mortgage, like having more disposable income or money for travel.

Tip: If you’re contemplating whether to pay off your mortgage or invest the extra money, consider both the financial and emotional impacts.

In Summary

It turns out the answer to “Is it better to pay off your house or invest the money?” is not as straightforward as it would seem, given the diverse alternative savings approaches and debt reduction prioritization considerations.

Before making a final decision, speak with your wealth adviser to determine the long-term impact on your retirement income plan.

Contact Adviser anytime for assistance. We pride ourselves on being The Planner You Can Talk To.


Tax and legal information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice. Always consult a licensed attorney or tax professional regarding your specific legal or tax situation.

Our statements and opinions are subject to change without notice. All investments carry risk of loss and there is no guarantee that investment objectives will be achieved.

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