Should You Pay Down Your Mortgage or Invest the Money?

The most important rule of personal finance is to earn more than you spend. But after budgeting and working hard for decades, you may start accumulating more money each month than you actually need. It’s a good problem to have, but now you need to decide on the most appropriate way to allocate it.

You don’t want to leave the extra funds sitting in a savings or checking account where you’re earning less than a percent of interest. Instead, you want to put your money to work. Usually, people end up doing one of two things: paying down their mortgage or investing. Because both options make financial sense, it can be a difficult decision for people to decide between them. Here are some pros and cons of each strategy:

Which Option Will Provide The Most Growth?

When deciding between these two options, you first want to know which option can provide the greatest payoff. In this case, it’s your mortgage rate versus your expected investment return. You can calculate some rough estimates to evaluate which decision would make more financial sense.

Let’s consider an example. Say your mortgage interest rate is 5%. If you estimate that, based on your risk tolerance and time horizon, you can expect an investment return of 4%, it could make more sense to pay down your mortgage. Otherwise, you’re potentially throwing away 1%. However, if you are an aggressive investor and believe you could earn 8% on your investment, it could make more sense to invest.

This may sound simple on paper, but there are a lot of factors at play. And as we all know, even the best of predictions aren’t guaranteed. It’s important to run a thorough analysis and factor in taxes on investments, mortgage interest deductions, risk, and private mortgage insurance, among other elements of your financial life. An experienced financial advisor can run all of the calculations and do a complete examination of your unique situation.

The Pros and Cons

There are some pros and cons to each that go beyond the raw math. Liquidity is a significant pro for the investing option. You’ll have easier access to it in case of an emergency. However, if you put the money towards your mortgage, it’s gone, for all intents and purposes. The only way to get the money back out is to sell your house or refinance your mortgage.

However, an advantage of paying down your mortgage is that your house will be paid off sooner. You will have a greater chance of being able to enter retirement without a mortgage, or at least have your mortgage paid off sooner during retirement. That way you can free up more of your money before your medical expenses start to pile up. If you invest, your mortgage will be another bill you have to pay while in retirement.

Another benefit of paying off your mortgage completely is decreasing your risk. Once you own your home free and clear, you never have to worry about a foreclosure or having your credit damaged by missed mortgage payments. However, you still have to pay your taxes and carry some risk of having a lien placed against your property.

Combining Options

For some people, it may make more sense to choose a combination of these two choices. For example, if you have less than 20% equity in your property, you may be required to pay private mortgage insurance, meaning you owe additional premiums on top of your mortgage principal and interest payments.

In this case, even if your mortgage rate is 5% and you can earn 6% on an investment, you may still earn a higher return on your money by paying down your mortgage. Once you pay it down to at least 80%, you free yourself of the need for private mortgage insurance and you can start investing if you decide that’s the ideal option for you.

How I Can Help

There are several factors to take into consideration when choosing whether to use your excess  money to pay down your mortgage or increase your investing. At D. Bryant Retirement Strategies, I want to help you make wise decisions with your money so you can set yourself up for the most successful retirement possible. As you near or enter this life milestone, let me partner with you to calculate the best return on your money so we can see growth in your retirement savings which will produce the income you need in retirement. Call us at (402) 932-2141 or email contact@dbretirement.com.