There’s much debate about whether you should pay off your mortgage early or invest your money.
Both options have their own set of pros and cons. Finding out which one is the right choice for you can be tricky.
In this article, we’ll look at both sides of the argument. Hopefully, by the end of this post, you will be able to make an informed decision for your financial future!
Should you pay off your mortgage early or invest the money?
This is a question that many people are asking these days, including us on our fire journey.
It’s important to note that both options have their own benefits and drawbacks.
Let’s examine each option in more detail to help you decide which is right!
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Table of Contents
What Does the Math Say? Loan Interest Saved vs. Investment Gains
When deciding whether to pay off your mortgage or invest your money, it’s important to look at the numbers.
First, let’s see what the math looks like if you didn’t pay off your mortgage early and didn’t invest money.
You have a $180,000 total mortgage on a 30-year plan (10% downpayment of $20,000).
Over the 30-year amortization period at a 5% interest rate, you would have made 360 monthly (12x per year) payments of $960.64. You would have paid $180,000.00 in principal, $165,831.56 in interest, for a total of $345,831.56.
If you do not pay your mortgage early, you will have paid almost as much interest as the principal.
But what would happen if you paid even just $100 extra per month on top of your minimum?
The math of paying off your mortgage first ($100)
Let’s use the same data listed above but say you paid only $100 extra per month.
You would have made 292 monthly (12x per year) payments of $1,060.64 ($960.64 + $100.00) and one final payment of $469.09. You would have paid $180,000.00 in principal, $130,176.91 in interest, for a total of $310,176.91.
In this scenario, your 30-year mortgage would be paid off approx 5.5 years sooner, and you’d save $35,654.65 in interest charges!
The math of paying off your mortgage first ($500)
Let’s step it up a little. What would happen if you paid even just $500 extra per month on top of your minimum?
Over the 30-year amortization period at a 5% interest rate, you would have made 172 monthly (12x per year) payments of $1,460.64 ($960.64 + $500.00) and one final payment of $655.86.
You’d still have paid $180,000.00 in principal but only $71,886.49 in interest for a total of $251,886.49.
In this scenario, your 30-year mortgage would be paid off approx 15.5 years sooner, and you’d save $93,945.07 in interest charges!
As you can see with the math, paying off your mortgage early is advantageous. But how does that compare to investing your money first?
The math of investing your money first ($100-$500)
On the other hand, choosing to invest could potentially see much higher returns.
For example, if you started with $20,000 and invested $100 per month in the S&P 500 with an average return of 10.5%, in 30 years, you will have $616,908.93.
That’s a huge difference compared to if you kept that in the bank earning next to 0% interest. You’d only have $56,000 saved in the bank after 30 years!
With an investment of $500 per month in the same asset with the same average return for 30 years, you can expect to see a balance of $1,485,140.10!
Paying Off Your Mortgage First: The Pros
When it comes to paying off your mortgage early, there are several pros to consider:
Save money each month. You’ll save on interest payments over the life of the loan, which can add up to a lot of money.
Peace of mind: Knowing that your mortgage is paid off will give you peace of mind and financial security. Especially when you know you have a physical place you can live in.
Build equity: Paying down your mortgage will help you build equity in your home faster. This can open opportunities for a home equity line of credit, allowing you to borrow against your house to buy more assets if you wish.
Lower Interest Rate: You may get a lower interest rate on your mortgage if it’s paid off early.
Debt Free Sooner: You’ll be debt-free sooner and won’t have to worry about making monthly mortgage payments.
More Financial Freedom: Once your mortgage is paid off, you’ll have more financial freedom and can use your money for other things.
Less Risky Than Investing: Paying off your mortgage is relatively low-risk, whereas investing can be risky. With mortgage payments, you can easily track how much longer it would take to pay off your house and own the property.
Paying Off Your Mortgage First: The Cons
While there are definite advantages to paying off your mortgage early, there are also a few potential drawbacks.
Missed Opportunities: You may miss out on potential investment gains if you use your money to repay the loan. Compound interest is a powerful tool, and over time you could earn more money by investing your money than you would save by paying off the mortgage.
Strained Budget: Paying off a mortgage early can strain your monthly budget, as you’ll have less money to work with each month. This can make it difficult to cover other expenses or save for future goals.
Difficult To Save For Other Assets: It may take longer to save up for a down payment on a new home if you’re putting all of your extra money toward the mortgage
Less Flexibility: You may not have as much flexibility with your finances if you’re focused on paying off the loan as quickly as possible
These are all valid concerns that should be considered before deciding whether to pay off your mortgage early or invest your money.
Invest Your Money First: The Pros
Now let’s look at the other side of the argument, investing your money instead of using it to pay off your mortgage. There are several potential benefits to this approach; let’s learn more.
Start investing sooner: You may be able to grow your investment faster than you could pay off the loan. This can be essential for long-term compounding.
More options for lucrative investment opportunities: You’ll have more flexibility with your finances if you’re not focused on paying off the mortgage as quickly as possible
Diversify your portfolio: Owning more assets and diversifying your portfolio can help reduce your overall risk.
Potential for higher returns: With a good investment, you could make more money than you would save by paying off your mortgage.
These are all good reasons to consider investing your money or using it to pay off your mortgage. However, there are also some potential drawbacks to keep in mind.
Invest Your Money First: The Cons
Just like there are pros to paying off your mortgage early, there are also cons to investing your money instead:
Bad investments: There’s always the risk of losing money on your investments; that’s why it’s important to diversify investments and not put the majority of your money into high-risk investments.
Riskier Than Paying Off Mortgage: Investing is inherently riskier than paying down your mortgage, as there’s no guarantee you’ll make any money back.
Takes Longer To Pay Off Mortgage: If you choose to invest your money, it will take longer to pay off your mortgage. This could mean paying more in interest over the life of the loan.
These factors are worth considering before deciding which route to take with your money.
Which is better? Paying off your mortgage or investing your money?
There’s no easy answer, as it depends on each individual’s unique circumstances. However, you can make the right decision by carefully considering all the pros and cons.
When weighing the pros and cons of each option, it’s important to consider what could happen in the worst-case scenario. Doing so will help you make an informed decision about what’s best for you and your finances.
Worst Case Scenarios
When deciding which option to choose, investing or paying off your mortgage, it can be helpful to look at the worst-case scenarios.
To make an informed decision, you need to understand the risks and the potential rewards involved.
Paying Off Your Mortgage Late: The Worst-Case Scenario
If one day you lose your job or main source of income, and you can’t make your monthly mortgage payment, you could end up in a very difficult situation. You may have to sell your home at a loss or even face foreclosure.
Investing Your Money: The Worst-Case Scenario
If you invest your money and the stock market crashes, you could lose a significant portion of your investment. This could leave you in a difficult financial situation and cause you to miss out on important growth opportunities.
A Synergistic Approach
The good news is you don’t have to pick only one strategy! You can pay more than your minimum monthly payments and automate an investment strategy.
This synergistic approach will allow you to reap the rewards of compound interest while also paying off your mortgage early.
What a $100 split strategy would look like:
For example, let’s say your mortgage payments are $960.64 and you have an extra $100 per month. You can pay $50 as a monthly prepayment allowing you to pay off your mortgage faster and use the other $50 to invest in an asset like the S&P 500 which returns on average 10.5%.
By the end of the amortization period, with your monthly (12x per year) prepayment of $50, you save $20,174.19 in interest and pay your mortgage off 37 months sooner than if you had the same mortgage with no prepayment.
With the other $50 per month invested (after an initial $20,000 investment, same as 10% on a $200,000 house), you will have $508,380.03.
Here’s what it would look like with $500 split between the two options evenly:
With your monthly (12x per year) prepayment of $250.00, you save $66,450.76 in interest and pay your mortgage off 129 months sooner than if you had the same mortgage with no prepayment.
In 30 years, you will have $942,495.62 if invested using the same metrics above except with a $250 monthly contribution.
As you can see, splitting your allocation evenly between the two options can help you gain both of the benefits. By the end of it all, you’d have a solid retirement fund and get to enjoy being debt-free sooner.
You may prefer debt-free sooner over a large fund in a few decades. If so, you can allocate more of your monthly income towards that endeavor. However, this should help illustrate the benefits of using both strategies.
A great way to start investing in real estate without a lot of money is with Fundrise, a crowdsourcing real estate investing platform.
With investment minimums of ONLY $10, you can start making PASSIVE INCOME with your real estate investment portfolio!
The Bottom Line
You can customize your investments with your debt management to your preference.
Just remember that compound interest works best when starting early. It’s also important to know that the S&P 500 has relatively predictable returns. Each investment will have its own risk-to-reward ratio.
A synergistic approach may be the best overall strategy for you. Paying more than your minimum monthly payments and automating an investment strategy will help ensure success on both fronts.
Ultimately, the choice between paying off your mortgage or investing your money is a personal one. There’s no right or wrong answer, and the best decision for you will depend on your unique financial situation.
You could try enjoying the benefits of both strategies. Invest some of your money and pay more than the minimum monthly payment on your mortgage.
Whatever you decide, remember to start early and do your research before making any decisions with your money.
We hope this blog post has helped you weigh the pros and cons of each option. Best of luck to you on your financial journey!
Related Content: Our Top 2022 IRA Investments
Disclaimer:
We hope the information in this article provides valuable insights to every reader but we, the Biesingers, are not financial advisors. When making your personal finance decisions, research multiple sources and/or receive advice from a licensed professional. As always, we wish you the best in your pursuit of financial independence!
