Pay Off Mortgage or Invest: What Should You Do?

pay off mortgage or invest

A mortgage is a commitment to making monthly payments for decades. There is an option to pay more than what you’re required each month.

Alternatively, you can save that money and invest it instead in places that offer consistent returns like the stock market. Many people feel torn deciding between the two.

To help you make a better decision, let’s look at each option in-depth and find a possible path for you to take.

Prioritizing Mortgage is the Best Option

A common misconception with mortgages is that you should only pay the minimum required early on. When you have more purchasing power, you can work towards paying off the loan decades later.

The proper way to speed up the completion of your mortgage is to pay a lot more early on.

  • The faster you can reduce the loan principal, the smaller your payments will be since less interest will accrue
  • Paying much of the principal early means you’ll have more money for investing


Why Investing Early Matters

Like paying off the mortgage early, investing early is also one of the best strategies available to grow your wealth. Compound interest is one of the most powerful factors for driving growth.

  • The dollar you put in an investment today will be worth much more after five or ten years as interest accrues
  • Data shows that these returns withstand the downward trends of a volatile market when held long-term
  • Saving at a younger age when you have more freedom to pursue it aggressively allows time for your portfolio to grow

One argument that many are pointing to right now is that mortgage rates are at historic lows. With accommodations to the pandemic and other market-related events, more people have money to invest now.

Of course, having a balanced portfolio is also a part of the equation. Mixing in safer investments with riskier ones allows you to maximize your returns and prepare a cushion if the markets head into a downturn.

It’s also a way to diversify. It can ensure that your entire portfolio doesn’t go down because you have your capital in different investment vehicles.


A Historical Look

Looking at it from a different perspective, let’s compare a mortgage strategy with an investment strategy. If you invested in the S&P 500, you’d still be earning less than if you’d pay off your mortgage early.


The S&P 500 only outperformed mortgage payments 40% of the time. It means that for 26 years, you would’ve been better off paying the mortgage instead.


The S&P averaged around 5% growth a year, though it did increase in 2009, with an average of 15% return for five years. When you’re considering historical data, the stock market's returns don’t amount to much compared to a lower interest rate from your mortgage.


Alternative Investments

When it comes to alternative investments, it is a different thing altogether. Commodities, collectibles, or cryptocurrency can offer superb returns.

However, there is a lot more volatility and risk with these types of investments. You can invest in a top cryptocurrency and achieve 5-10x returns within a year or two, only to have it drop by 80% in price because you didn’t sell.

There is a chance that alternative investments can go to zero if you’re not careful. Research about specific markets is vital to surviving in those environments.

Many investors are not comfortable with those conditions, and they choose the assurance of the stock market.

With that said, we cannot deny that some people are earning much more. It is because they’re putting their money in alternative investments rather than paying off their mortgage.


The Pros and Cons of Paying off Your Mortgage

Primary benefits to paying off your mortgage first:

  • Less interest accrued can save tens of thousands of dollars in the long run
  • Peace of mind that comes with eliminating debt

Disadvantages to paying off your mortgage first:

  • Loss of tax savings that apply to mortgage interest
  • Homes can take time to liquidate, so may not be the best choice of primary investment


The Pros and Cons of Investing Early

Benefits to investing as early as possible include:

  • Potential for higher returns, especially given current market conditions
  • Investments can be liquidated quickly if you need to cash out

Disadvantages to prioritizing investments over your mortgage:

  • Accrued interest may lead to higher home loan costs if you pay over a longer term
  • The stock market can be much more volatile than the housing market

If you choose to prioritize investments, consider a tax-advantaged account. You can pay taxes before the investment and enjoy an ROI without having to worry about your taxes when you access your retirement fund.


Risk Management

However, no matter where you’re investing, there’s always an inherent risk. You could enter the market at a high and experience no returns at all for years.

You’ll also have to be able to weather the ups and downs of the market. Many fail at investing because they were too emotional with their money.

By prioritizing investments first, you’re also saying that you’ll be holding on to your mortgage debt for longer. There is a risk that your debt can increase, and your home will never be yours until you pay off the debt you owe.


Investments are a long-term game. You cannot expect much from it until five to ten years.


Unless you are investing in something high-risk, then you’ll want to set expectations. Not a lot of people are willing to see their money go down significantly.

However, if you are the type of investor who has a higher risk tolerance, you can decide on pursuing high-risk, high-reward investments.


Personal Calculations

Before deciding fully on one path, there are many handy tools available for you to use. You can use tools like:

  • Compounding interest calculators: to get an idea of how interest accrues or how investments grow
  • Average rates of return: for the S&P markets or others
  • Amortization calculators: to create a payment strategy that will lower the value of interest over time


Why Not Both?

Most people look at mortgages and investments as two opposing sides, but there is a compromise. You can get both without sacrificing much.

Since mortgage rates are at historic lows, one way you can change your current situation is to refinance.

In refinancing, you are paying off the old loan to get one with better terms. You can:

  • Take advantage of low mortgage rates, which will free up most of your spending power
  • Pay extra on your new lower rate to quickly reduce the interest
  • Have more money to invest, earning larger returns

While you are not maximizing the potential of each, you’re still accelerating both of them at the same time. 

You are reducing debt and growing wealth.

You still have to be careful about the mortgage terms, as some newer plans may have higher closing rates. After things settle down, part of the extra savings you get from the mortgage goes to paying off the principal while the other invests.

The best course will always be somewhere in between. 

You’ll have more liquidity if you pay off your mortgage. Then, you can also secure your future finances if you have investments.


There is No Single Solution

Investing and paying off a mortgage are both attractive options. Deciding how to approach your financial plan will depend on your preferences, goals, and current circumstances.

Handle your mortgage first if:

  • You want to be free of debt
  • High interest rates are impacting your bottom line

Prioritize investing if:

  • A market at historic lows makes investing now enticing
  • A buyer’s stock market means aggressive portfolio growth

Others want to have a middle ground where they can work on both and try to achieve their goals as early as possible with what they have. It makes sense, as you take advantage of the benefits of both while trying to limit their downside.

No matter what you decide, you have to run the numbers. 

Make sure you are going down a path that you’ll enjoy more in the long run. This whole situation becomes a lot more difficult if you cannot find any joy or positivity in it. 

You’ll have to be honest with yourself. Decide on a path that speaks to you, trust yourself, and grow your wealth in a variety of ways to improve your life overall.


Try Both With 121 Financial Credit Union

If you’re looking for a refinancing plan to take advantage of better mortgage rates, consider finding one with 121 Financial Credit Union. We offer: 

Our goal is always to find the best benefit for our members.

Contact us today and learn more about our services. We’ll do our best to answer all your concerns and offer you some of the best services in the market.

Back to Blog

Related Articles

Pay Off Debt or Save Money: What Should You Do?

Have you found yourself with a bit of extra income and are unsure what to do with it? "Should I...

Beginner's Guide to Investing: How to Start Investing In 5 Easy Steps

Investing your money can be one of the best decisions of your life if you manage to pull the right...

Fixed vs Adjustable Rate Mortgage: Finding Your Ideal Home Loan

Are you on the hunt for your dream home and trying to navigate the complex world of mortgages? ...