Should I Pay Off My Mortgage or Invest?


Should I pay off my mortgage or invest my extra money?


The answer to this question is highly subjective. It will depend on your personal philosophies, financial discipline, financial goals, length of time you plan to stay in your house, your track record of success with investments, and several other factors.

Seeing as how the answer is either one or the other, I will present some of the reasons you might consider doing each of them, and in addition, some shades of gray you might not have previously considered.

The most important thing to address here is the “ allocation” of your extra money. There are only two places you can allocate your money: expenses that affect net worth and those that do not. For instance, your electricity bill does not affect your net worth, but you must spend it if you want electricity. As the question is posed, both paying down a mortgage and investing are activities that would affect your net worth. The question simply remains, which one will have the greater benefit according to your personal preferences.

More specifically, paying off a mortgage decreases your financial liability thus increasing net worth. Conversely, adding money to an investment increases your balance of assets, thus increasing net worth. From a purely mathematical standpoint, you’d likely choose whichever activity has the greater benefit to your net worth.

Depending on the type of loan you have, in general the net interest you EARN on an investment at 6% should be comparable to the net interest you PAY on a mortgage. This is the simplest way to make your decision: allocate your money to whichever has the higher interest rate. But this math is seldom the only factor. For example, if you know you are the kind of person that would be tempted to spend extra money accumulating in an investment account, it may be wiser to put that money towards your home even if it carries a lower interest rate than your investment account.

In general, if you are financially disciplined enough to maintain your investments, and especially if you have a track record of successful budgeting and investing, the benefits offered by sound investments usually trump those of putting money towards your home. The caveat is that you must consistently earn a sufficient rate of return to offset the additional interest you are being charged by leaving your mortgage balance alone. A point made by several financial gurus is that the money left in your mortgage balance gets you a tax benefit as well.

Because of the above concept, several gurus have advocated carrying the biggest, longest, cheapest mortgage you can, and completely leveraging all your home’s equity into investments that will hopefully pay more in interest than the home costs, and additionally provide a tax benefit. This thinking is very sound in principal, but once again, the random acts of human behavior have disproved nullified this recommendation. I personally only advise seasoned investors and/or budgeters to do this.

Arguments also arise that extra money put toward the home is “lost” in the sense that it is much more difficult to tap in an emergency, takes longer to get to, and can be unavailable all together if you cannot qualify for a loan, or if your home has depreciated. This argument clearly indicates investments as a superior choice as they are in your control and not the bank’s. In a volatile mortgage and housing market, your access to your money and the accumulation thereof is more assured.

Whatever the case, you must clearly understand and remember that your mortgage is a DEBT, and your HOUSE is an ASSET. A debt is something that is progressively repaid, whereas an asset is something that can gain or lose value. This complicates the matter for most people as they view their reduction of mortgage debt as an increase in their home equity. This is NOT the case.

The only thing accomplished by reducing mortgage debt is that you will owe less on a debt that is secured by your home. During this time your home could go up, down, or stay the same in value. If it stays the same or goes up, then indeed you are increasing your home equity as you pay down debt. But if your home’s value goes down quickly enough, you can actually LOSE equity, thus decreasing your net worth.

The bottom line is to remember that your home’s value will add or decrease your net worth regardless of your mortgage. Assuming that you will not try to unethically “get out” of your mortgage debt, you will be paying your mortgage just like any other debt. This leaves you with the only real decision to be made here, and allows you to take your home out of the equation: should you pay down this mortgage debt, or should you increase your investment balance?

The answer to that question will depend on your personal preferences and should be considered carefully. On a final note, a very strong argument for investing excess money is the LIQUIDITY of investments versus the liquidity of home equity. One way to experience the benefits of liquidity AND decreased mortgage debt is the concept of mortgage acceleration, which has it’s own article.

Just remember, a mortgage is a debt, whereas a home and investments are assets. Treat them all as separate things when considering your decision. If any part of this very long answer is unclear or if you would appreciate further explanation on something, please email me so I can update the answer.

Answered over 9 years ago
Matthew Graham
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