Pay Off Mortgage Faster or Invest: The Dilemma

As a homeowner, you’ve likely pondered this question. On one hand, paying off your mortgage early can bring peace of mind and eliminate that monthly payment hanging over your head. On the other hand, investing your extra cash could potentially yield higher returns. Let’s break it down:

1. Paying Off Your Mortgage Early

Pros:

Debt Freedom: Being mortgage-free is a worthy goal. It provides emotional satisfaction and reduces financial stress.
Interest Savings: By paying off your mortgage early, you save on interest payments over the life of the loan.
Simplicity: Fewer financial obligations can simplify your financial life.

Cons:

Opportunity Cost: When you allocate funds to your mortgage, you miss out on potential investment gains.
Low Mortgage Rates: If you have a mortgage loan with a very low interest rate, it’s relatively cheap to hold debt.

2. Investing Your Extra Funds

Pros:

Higher Returns: Historically, the stock market has returned an average of 10% to 11% annually. Even with a more conservative estimate of 8%, investing could outpace your mortgage interest savings.
Liquidity: Investments provide flexibility. You can often access your funds if needed.

Cons:

Market Volatility: Investments come with risk. The stock market can be unpredictable.
Psychological Factors: Some people prefer the emotional security of being debt-free.
Penalties & fees: Depending on the type of investment the funds are invested in there is a possibility of having additional penalties or fee's on an early withdrawal.

The Math Behind It

Let’s consider an example:

You have a 30-year mortgage of $200,000 at a fixed rate of 4.5%.
Your monthly mortgage payment is $1,013 (excluding taxes and insurance).
You can allocate an extra $300 per month.

Paying Off Mortgage Early:

By applying the extra $300, you’d shave off 11 years and save $67,816 in interest.
Remaining mortgage balance after 19 years: $55,293.

Investing in the S&P 500 Index:

Assuming an 8% annual return, after 19 years, your investment would grow to $160,780.
That’s more than double your potential interest savings.
You’d still have $105,487 left on your mortgage.

The Verdict

Depending on your situation, investing might make more since. However, life isn’t just about numbers. Consider your risk tolerance, emotional well-being, and long-term goals. Perhaps a balanced approach is best: invest while maintaining a manageable mortgage.

www.forbes.com/advisor/investing/average-stock-market-return/