Should You Pay Off Your Mortgage Or Invest?
I get asked this question a lot.
Should I focus on paying off my mortgage or invest?
This is a tough question to answer with a blanket statement general response because everyone’s financial situation is so drastically different.
In an ideal world, you would do both. But typically, most people have to focus more on one or the other. And even more ideal than that, you’d have so much money that you would be able to buy the house outright. But I normally wouldn’t even recommend that to people who have 10 million dollars or more. Maybe if you have 100 million in net worth and have a tremendous cash flow already. 99.99% of you who are reading this don’t have more than 10 million dollars in net worth, let alone 100 million. But I’ll get into more of my thought process further down.
Pros of paying off/down a mortgage
- You save money on interest payments. This is the most obvious benefit of paying off a mortgage and will help you reduce the total cost of ownership on your house
- Having a mortgage is kinda like having a bond with a negative interest rate, and right now bonds are paying less than what it costs in mortgage interest rate, on average
- Once you pay off your house 100%, it’ll free up your cash flow so that you can put it towards other things
- In my opinion, the biggest advantage to paying off a mortgage is the psychological benefit. Because mathematically (generally speaking) investing your extra money comes out ahead. I think this alone would be a big enough pro in my mind where I would recommend someone to just pay off their mortgage; because in life, some things you can’t calculate just strictly with math. Emotions, stress, and anxiety are all very real things. So I can just see how much benefit a person would have by owning their house outright from a quality of life perspective. Which is kinda more important than market returns.
Cons of paying off/down a mortgage
- Again, mathematically speaking, based on historic stock market returns, you will come out ahead by investing long term in the stock market rather than paying down your mortgage
- Your cash flow is reduced by quite a bit during the pay-down. And if you’re like most home-owners, it’ll take you decades to pay off your mortgage. So we’re talking a life-long reduction in cash flow here. But you can adjust this impact by changing the amount of money you throw into paying down the mortgage.
- Inflation. Have you heard of this? What people often forget is that inflation is a big variable to the true cost of the loan because the rate on your mortgage is fixed (unless you have an ARM, but I won’t get into that because most often people take out a fixed 30 year loan). In other words, every dollar you pay in interest is a lot less than the dollar you pay today. So over time, the interest actual dollar amount doesn’t change but the value of it changes. Does this make sense?
- Here’s another one that has to do with inflation: if let’s say, your interest is 4% and inflation is sitting at about 3%. That means you’re only really paying 1% in real interest.
- General consensus within the finance community, which I agree with, is that you should first take advantage of maxing out some of your tax advantaged retirement options, especially if you have something like an employer match up to a certain amount (because it’s free money!).
- Another thing to consider is that if you’re living in the USA, you have access to something that most people around the world don’t have access to. And that is a bank or some institution lending you a huge amount of money and gives you 30 years to pay it off. That is crazy if you think about it. Most countries don’t have anything like this. 30 years is a long time.
- One of the biggest disadvantages of paying down your house is this by a long shot: you lock your money up. Plain and simple. All that money does nothing for you sitting in a house that’s gonna appreciate or depreciate anyways regardless of how much money you have tied in it.
Some other stuff you need to take into consideration
Like I mentioned in the beginning. There’s no hard rule for things like this because everyone’s financial situation is so different. Here are some other stuff that you need to take into consideration:
- How much “job” security do you have? Keep in mind, your actual job security might differ from what you’re thinking in your head because let’s face it, nothing’s guaranteed in life and I just don’t see anyone having 100% true job security. I just don’t think anything like that exists
- How much freed up cash flow do you have from all your sources of income? If you have only one source as opposed to say, 2 along with your wife/husband, then that’ll be another variable. I think the less sources of income you have, I would tilt towards not paying down your mortgage because you need your money to be far more liquid (available for you to access) in case of emergencies.
- Are you renting out rooms? Or the whole place? This is big, since someone else is paying off your mortgage. That said, I wouldn’t underestimate how much work it is, to have renters. Personally, I think it’s too romanticized. A lot of people think that it’s easy to be a land lord, but my experience and the horror stories I’ve heard says otherwise. But again, it depends on the situation because I’ve seen scenarios where it works (due to local market conditions) and where the house is located, etc.
Conclusion and Take-aways
Personally, if it were me, I wouldn’t pay it off. But that’s my personal situation. Like I said, everyone’s financial situation is different, as well as appetite for risk. Personally (as of writing this, because I might be in a different place in life 5 years down the road, or even tomorrow if you think about it, since life is unpredictable that way), if I could borrow $100 billion dollars at 4%, over 30 years, I’d do it. But not everyone would even want to do that from a psychological and emotional standpoint.
And even after saying that, there are many days where I want to just sell everything I own and move my family to a log cabin deep in the woods somewhere with a lot of private land and not see anyone other than wildlife for extended periods of time, haha.
Mathematically-speaking, investing your money long term in the stock market, based on historical returns, would give you a better return on your money than paying off/down your mortgage.
But I wouldn’t underestimate the psychological benefit to owning your home outright. For this reason alone, I can see paying off your mortgage being better than not because anxiety and stress is crippling. So if you would lessen your stress and anxiety by having a paid off house, then absolutely I would opt for that in 99% of situations.
I hope this helped!