Should I pay off my Mortgage or Invest?

Ben Le Fort
May 28 · 4 min read
Three piles of coins each bigger than the last with a plant sprouting from the top sit next to an alarm clock.
Three piles of coins each bigger than the last with a plant sprouting from the top sit next to an alarm clock.
Image by Nattanan Kanchanaprat from Pixabay

“The longer it will take you to pay off your mortgage, the more the math favor investing over paying off the mortgage.”

One of the longest-running debates in personal finance is the question of whether to use extra money to pay off your mortgage or invest.

3 Things to do Before Considering Either Option

Before you get aggressive on investing or paying off your mortgage you need to ensure your financial house is in order. Before choosing either option, you should have the following.

1. A fully-funded emergency fund

2. All your non-mortgage/high-interest debt paid off

3. Already be allocating at least 15% of your income to retirement savings

Once you have the financial essentials on lockdown, it’s time to decide which is better investing or paying off the mortgage.

Running the Numbers

Let’s say you have a $500,000 mortgage with an interest rate of 4% that is set to be paid off in 30 years.

Your mortgage payment would be $2,378 per month.

Over that 30 years, you would pay $856,000, of which $500,000 would be principal payments and $356,000 would be interest payments.

If you wanted to aggressively pay the mortgage off in 10 years, you would pay $607,000, of which $500,00 would be principal payments and $107,000 would be interest payments. This would save you $249,000 in interest payments.

To pay off the mortgage in 10 years rather than 30 years would require you to increase your monthly payment to $5,055 an increase of $2,677 per month.

How much money would you expect to have after 30 years by investing $2,677 per month? Assuming a 6% annual return, you would have approximately $2.69 million. Clearly a better-expected return than paying off the mortgage quicker.

I am sure the Dave Ramsey fans are thinking wait! What if you pay the mortgage off in 10 years and then “go nuts” on investing the once the mortgage payment is completely gone?

It’s a completely valid point. The reason you pay the mortgage off is to be rid of the mortgage payment. Once you’ve paid off the mortgage you will have an extra $5,055 each month. What happens if you dedicate that new cash flow to investing?

Let’s run those numbers

If after you pay off the mortgage in 10 years, you invest the entire $5,055 (your previous mortgage payment) for the next 20 years you would have $2.34 million. Add in the $249,000 saved from paying off the mortgage earlier and you have $2,589,000.

While this makes the math much closer, you still have more expected wealth after 30 years by investing.

Important Factors to Consider

Time Horizon

Paying off your mortgage in 10 years rather than 30 years is extremely aggressive and the math still favors investing. The math would be even more favorable towards investing in a scenario where the mortgage was paid off in 15 or 20 years rather than 10 years.

The reason? Compound interest.

The longer it will take you to pay off your mortgage, the more the math will favor investing over paying off the mortgage.

Your Mortgage Rate Makes a Huge Difference

I used a mortgage rate of 4% in this example. At this rate, the math is close when it comes to paying your mortgage off in 10 years compared to investing.

You Need to Account for Risk

Paying off your mortgage provides you with a guaranteed return, which is lower than the expected return on investing. Note the word “expected” because it is doing a lot of heavy lifting in that sentence.

Investing involves risk and there is no guarantee on your returns. Over the next 30 years, a balanced investment portfolio might provide an average rate of return greater than 6% or less than 6%.

If your risk tolerance and level of comfort with investing are low, you may be better off paying the mortgage off before investing. While it may not be the optimal choice according to the math if going paying off the mortgage will help you sleep better at night then numbers be damned!

If your risk tolerance and level of comfort with investing are high, then you will probably enjoy going the investment route and watching your net worth grow over time.

So, which is better, paying off the mortgage or investing? It should be clear by now that the answer is, “it depends”. It depends on all the factors just discussed.

It’s less important which option you choose and more important that you find a way to increase your savings rate. How much money you save will be the determining factor of how much wealth you build.


Making of a Millionaire is pleased to offer a FREE personal finance course “Aligning Your Money With Your Values

This article is for informational purposes only, it should not be considered Financial or Legal Advice. Consult a financial professional before making any major financial decisions.

Making of a Millionaire

Stories about money, personal finance and the path to financial independence.

Ben Le Fort

Written by

Sharing the lessons I’ve learned on my journey from debt to Financial Independence. Email me for freelance inquiries: makinfofamillionairepublishing@gmail.com

Making of a Millionaire

Stories about money, personal finance and the path to financial independence.

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