Should You Pay Off Your Mortgage or Invest Your Extra Money?

Pay off my mortgage, or invest my money?

If you’ve recently gotten a windfall -- say, a big work bonus, or an inheritance from a long-lost uncle -- you might be wondering whether to pay off your mortgage or invest the extra cash in order to make more money in the future.

When it comes to deciding the best way to spend your extra money, there are several factors to take into account. This includes the type of mortgage you currently have, your personal appetite for risk, and how much you expect to get from your potential investment. We’ll help you make the call.

Paying Off Your Mortgage or Investing: The Most Important Factors to Consider

The most important things to consider when deciding whether to pay off your mortgage early or invest include:

  • The interest rate on your mortgage

  • Your age and projected retirement age

  • Your income tax rate (and any mortgage tax deductions you use)

  • Your expected rate of investment returns

Younger Borrowers With Lower Interest Rates Typically Benefit More from Investing

If you’re young and have a 30-year fixed rate mortgage with an interest rate of around 4%, you may want to consider putting most of your extra money into investments.

The type of investment you make matters here, though, as it needs to be significantly above the 4% interest rate on your mortgage to make it worth your while. Keep in mind, a mortgage interest tax deduction can often cut another 1% from a borrower’s effective mortgage rate, so you’ll want to incorporate that into your calculations as well.

The younger you are, the more aggressively you can invest without impacting your long-term gains, but it isn’t wise to be risky for no reason (read: don’t jump into penny stocks or Bitcoin just because your neighbor is doing it).

According to the financial giant Vanguard, from the years 1926 to 2016, an investment portfolio consisting of 70% stocks and 30% bonds (which can easily be found in many mutual funds) averaged a 9.1 percent annual return. That 9.1% return dwarfs the 4% interest you’d be paying on your mortgage by a hefty 5.1%, which means that for a young investor, putting your extra cash in a mutual fund could be the smartest idea.

Keep in mind though, that the market goes up and down (and can swing wildly at times), so you’ll need to keep your money in the market for years, if not decades, in order to give yourself a good chance at getting a similar return.

Older Borrowers With Higher Interest Rates May Prefer to Pay Off Their Mortgage

In comparison, if you have a higher interest rate (such as 6%) and you’re just a few years away from retirement, it could be a smarter move to divert more of your funds toward paying off your mortgage. 

The thought behind this: since you’ll be tapping into your retirement fund soon anyway, it may not make that much sense to put more money in the market, especially when it may only have a few years to appreciate. Plus, you’re already paying a high interest rate on your mortgage, which reduces your potential marginal gain to 3.1%, if we use the same 9.1% average return that we discussed earlier. For many older borrowers, that margin simply isn’t worth the risk of having additional funds in the market so close to retirement. 

No Matter What Your Age or Financial Situation, Do What’s Best for You

While responsibly investing money in the real estate market makes financial sense for the majority of homeowners out there, it isn’t for everyone. Some people really enjoy the peace of mind that comes with having no debt obligations -- even if they know they could be losing out on some potential gains. 

If this describes you, then you may simply want to pay off your mortgage; while extra money is great, you simply can’t put a price on peace of mind.

Before Paying Off a Mortgage or Investing, Do This First

While paying off your mortgage or investing money may both sound like noble goals (and they are), they might not be the first thing you should do with any extra money you have. In order to save the most money, you’ll likely want to pay off any credit card debt, medical debt, or other high-interest debt payments that could be eating away at your financial freedom.

Then, set aside some money (ideally six months of expenses) as an emergency fund, to make sure you and your family don’t face the same struggles that got you into debt in the first place! 

After those things are taken care of, you’ll also likely want to max out any tax-deferred retirement accounts, like Roth IRAs, and 401(k)s, since avoiding taxes on your investments can lead to significantly increased returns over time.

For more information on how to use your mortgage as a financial tool, contact the team at We’re always happy to hear from you!