Do I Pay Off My Mortgage or Invest?

By: Stacey Nickens

Perhaps you came into an inheritance or a bonus recently. Perhaps you have extra money sitting in your bank savings account. Either way, with extra cash on hand, you may ask yourself: Should I use this money to pay off my mortgage, or should I invest these funds?

The answer to this question depends on your specific life circumstances. In making the decision, you should consider your month-to-month cash flow, your current and long-term liquidity needs, inflation, and other factors. With that in mind, review some of the arguments below for paying off your mortgage or for investing. I then encourage you to set up a financial planning appointment in order to determine how to best use your money.

You may pay off your mortgage because…

• You want peace of mind. Holding debt can increase your stress levels, and if you find yourself regularly worrying about your debt, it may benefit you to pay down your mortgage. By negatively impacting your health, stress has long-term financial consequences in the form of higher medical bills and other related expenses. Paying off your mortgage could accordingly improve the quality of your mental health, which could indirectly benefit your wallet.
• You want a guaranteed return on your investment. Stock market returns are not guaranteed, but if you pay off a mortgage with a 4% interest rate, you’re technically earning a risk-free 4% return on that investment. Low-risk investors may find this math appealing in comparison to the volatility of stock market returns.
• You want or need to increase your monthly cash flow. If you are in this position, it may be lucrative to free up the monthly cash going towards your mortgage. You could then even use the extra cash flow to invest in the stock market each month.

You may want to invest your money because…

• You want to accumulate wealth. From 1926 to 2021, the S&P 500 has an average annualized return of 10.5%. Pretend the interest rate on your mortgage is 4%. Investing your money would theoretically offer you an annual return of 6.5% in excess of your mortgage interest rate. Especially with current inflationary pressures, investing your money with an eye an higher returns can help your savings keep pace with the rising costs of goods and services.
• You want to have flexibility with your money. Funds invested in the stock market tend to be more accessible and liquid than funds invested in a house. This greater degree of liquidity could become handy should you end up needing those funds.
• You want to take advantage of rising inflation. Higher inflation can reduce the burden of mortgage interest payments as long as inflation is higher than your interest rate. When inflation exceeds long-term interest rates, the “real” cost of paying down one’s mortgage becomes less expensive over time.

You may want to find an option in the middle.

• You could look into refinancing your mortgage. Doing so could help you lock in a low interest rate and save money in the long-term. You could then increase your monthly cash flow and reduce stress without paying off the entirety of your mortgage.
• You could do a little of both. If you have extra cash, you could use a portion to pay off a chunk of your mortgage. You could then invest the rest. Doing so might help you find the best of both worlds!