Should You Pay Down Your Mortgage or Invest the Money?
The golden rule of personal finance is simple: spend less than you earn. After years of careful budgeting and disciplined saving, you may find yourself with surplus cash each month. The question then becomes—what’s the best way to put that money to work?
Letting it sit in a low-yield savings or checking account could mean missing out on potential growth. Instead, many people choose one of two paths: paying down their mortgage or investing.
Deciding between the two options isn’t always straightforward, so let’s explore the benefits of each.
Which Option Offers the Best Financial Outcome?
When weighing the choice between paying down your mortgage or investing, the key factor is which option provides the greater financial benefit. Essentially, this comes down to comparing your mortgage interest rate with your potential investment returns. Estimating these figures gives you a rough idea of which path may be more advantageous.
For instance, if your mortgage rate is 5% and you anticipate earning only 4% from investments, prioritizing mortgage payments makes more sense—you’d effectively be losing 1% by investing instead. On the other hand, if you’re comfortable taking on more risk and believe you can achieve an 8% return, investing could be the better option.
While this calculation provides a starting point, the reality is more complex. Factors like taxes, mortgage interest deductions, investment risk, and private mortgage insurance all play a role in the final decision. Since financial projections are never guaranteed, working with a knowledgeable advisor can help you evaluate the numbers and determine the best strategy for your specific circumstances.
Weighing the Benefits and Drawbacks
Both paying down your mortgage and investing come with distinct advantages and trade-offs beyond just the numbers. One major advantage of investing is liquidity—you can access your funds more easily in case of an emergency. In contrast, putting extra money toward your mortgage means those funds are tied up in your home, only accessible if you refinance or sell.
Although, accelerating mortgage payments allows you to eliminate debt sooner, increasing the likelihood of entering retirement without a monthly mortgage payment. This method can free up more of your income for other priorities—especially as healthcare costs rise later in life.
Another key benefit of paying off your mortgage is reducing financial risk. Owning your home outright means you won’t have to worry about foreclosure or missed payments affecting your credit. However, you’ll still be responsible for property taxes, homeowners insurance, and potential liens.
A Balanced Approach
For some, a combination of both strategies may be the best route. If you have less than 20% equity in your home, you may be paying for private mortgage insurance (PMI). In this case, even if your expected investment return slightly exceeds your mortgage rate, paying down your loan to eliminate PMI could provide a better overall return. Once you reach 20% equity and no longer need PMI, you may find investing the excess funds to be a more strategic move.
How I Can Support Your Decision
Keep in mind that this is a broad overview of the key factors to consider. Every financial situation is unique and there are many other variables to weigh before making the right choice for you.
My goal is to help you make informed, strategic decisions with your money. With extensive experience working with affluent families, I’ve guided many clients through this very decision. If you’d like a personalized analysis to determine the best path forward, reach out at 217.268.3216 or fill out the contact information below.
