Should I Pay Off My Mortgage or Invest?

Print Friendly
pay off mortgage

Does your house own you?

Beware, financial geeks. You’re not going to like my answer to the question, “Should I pay off my mortgage or invest?”  Not to worry, I’ve since gone back and added the math analysis regarding paying off your mortgage

I’m making a few assumptions as I begin this post.

Pay Off Mortgage or Invest?  Starting Assumptions

  • If you’re asking this question, you’re in great financial shape.
  • All your consumer debt is paid off.  If you have an auto loan, pay that off first before entertaining this question.  Your credit cards need to be paid off before this is anything to worry about.
  • You are contributing a minimal or reasonable amount to retirement.  I’d put the minimal at 10% and reasonable at 15%.

Four Steps To Help You Know If You Should Pay Off My House Mortgage or Invest

With those assumptions in place, here is how I’d suggest you make this decision – invest or pay off the house mortgage.

Step #1 – Put all pens, papers, and calculators away.

Step #2 – Ask your husband or wife to join you on a walk

Step #3 – Ask each other this question – Would you rather pay off the house early or have extra money in investments?

Step #4 – Do whatever you feel like is the best choice, whatever you feel called to do, and whatever you think honors God.

Disclaimer: This approach is not transferable to other financial decisions.  If you are upside down in debt, do not make your financial decisions based on what you feel like.  This, instead, is a luxury offered only to those who are financially responsible and who have a proven track record for making wise financial decisions.

Upon purchasing a new home, it is smart to use a mortgage loan calculator to make sure your new investment is within your budget.

Why Paying Off the House Early is Not a Math Decision

One of the deadly sins of personal finance is the mindset that whatever makes more money is the best decision.

Instead, the best decision is the one that takes you further down the road according to your life goals.

My goal is not to accumulate as much money as possible.  Money is not the destination, but a vehicle to get me to where God wants me to be with my money.

For example, the decision to live debt free has more to do with the emotional impact than it does with the mathematics.  Interestingly, the math may drive the decision – you feel awful paying all that money (interest) to someone else.  That feeling of disgust will lead you to pay off your debt.  When the debt is paid off that feeling of disgust will be replaced with a feeling of satisfaction.  How you feel about your money is much more valuable than how much money you have.

Why I’m Paying Off My House Early

Here’s the thing.  I’d rather not lose x% of my money even if I could gain X% + 2.  What does that mean?  Let’s say you have a home loan at 6% and you feel confident that when everything clears (taxes, and fees) you can make 8% investing in the stock market.  Personally, I’d feel better knowing that I’m not paying someone $150 in interest every month, even if that means I miss out on the chance to make $170 in interest.

Does that make mathematical sense?  Nope. But, I don’t care.  I don’t like paying interest to other people so I’m going to deal with that first.  Later I may invest some of that money, but for now I get a bigger emotional payoff by paying off the house than I do by watching my investments grow in the market.

Are You Being A Good Steward If You Pay Off The House Early?

Is someone being a poor steward just because they don’t run the numbers?  I don’t think so.  God doesn’t require his children to be accountants, just to make him happy.  To be a steward is to responsibly use the resources you have.  If you are thinking about paying off your house early or doing extra investing you are a good steward.  Poor stewards don’t get to make these kinds of choices.

Well, there it is.  An entire post on paying off your home versus investing without a single mathematical equation.

Now, here’s how to pay off the mortgage early.

Photo by Okie Dan.

Any thoughts?

Comments

  1. says

    I think this is an intensely personal decision! But my two cents…

    If the mortgage is a fixed rate and the rate is on the lower end of the recent range, it might be ok to invest without paying it off. I say this because unlike credit cards or even a car loan, a mortgage is a static debt–again as long as it’s a fixed rate (and not a balloon) it won’t bite you in the fanny at some point in the future. The payments are predictable.

    Accumulating savings and investments while you’re paying your regular mortgage payments can give financial strength in a more immediate sense. I.E., you may not be able to payoff a $200,000 mortgage in five years, but you might be able to accumulate $50,000. Once you have that sized nest egg, it may be time to split your excess between increasing savings and paying off the mortgage–the best of both worlds.

    My own sense is that liquidity is absolutely crucial, and let’s face it, even if you pay off your mortgage, your house still isn’t very liquid.
    .-= Kevin@OutOfYourRut´s last blog ..Radical Self Reliance in the New Economy =-.

  2. Alan says

    I have lived through the conflict of financial advisors telling me to invest versus my gut feel of paying off my mortgage. You are right, it is hard to make the math work and this ends up being an emotional decision. In the end I paid off the mortgage. I can’t begin to tell you how much I enjoy the peace and freedom of living completely debt free. A few of additional items to consider:

    1) Cash flow – you don’t want to pay off your mortgage at the expense of an emergency fund or ability to consistently save
    2) Age factor – as you get older, you have less tolerance for the risk required to make the sort of investment that would earn more than your mortgage interest rate.
    3) Study your tax situation closely

    • Craig says

      Alan
      I thought your three additional items to consider were outstanding. Your comment really added a lot of value to the post.
      It is also nice to hear someone say that they paid off the house and love it.

  3. says

    I agree with Kevin that it is a personal decision and liquidity is crucial – however, if you have your house paid off that equates to less liquidity you need.

    I like the best of both worlds scenario where you are knocking the mortgage out and also increasing savings if possible.

    There is something to be said for having NO DEBT AT ALL!
    .-= Jason @ Redeeming Riches´s last blog ..How to Help in Haiti =-.

    • Craig says

      @Jason and Kevin,
      You guys got it right on – it is a personal decision.

      Reading comments like the one left by Alan makes me think it is an even better choice to get it paid off.

  4. gn says

    I’ve never “paid extra” on a mortgage already in place at the expense of savings. But I have dipped in to savings during a refi to reduce the principal balance (and avoid rolling closing costs into the new loan) which felt great.

    BTW I like having the flexibility granted by savings+unusedHELOC+biggerfixedmortgage more than the equivalent mix with a smaller mortgage. Pulling money out of a house in a hurry is not easy.

  5. FinancialBondage.org says

    Do both. Put 15% into Roth IRAs, etc… pre-tax retirement. And work on paying the house off. Step 4 and 6 of Dave Ramsey’s Baby steps.

    Cool thing about a paid for home is 100% of the time it can’t be foreclosed on. Not having a house payment puts tons of money back in the budget for other things, like saving and giving.

    • Craig says

      @FinancialBondage
      I agree. This post does state that it assumes a person is saving money for retirement. From there, I think there is no wrong choice.

  6. John Gargotta says

    After much financial and emotional consideration I paid off my house. I owe nothing on credit cards or car loans, have ample liquid cash reserves and stocks, max out my Simple retirement plan. I am fortunate and blessed.

    My only concern is the thought, “a house is not a liquid investment”. Your house should not be an investment….you need a place to live, not an asset that can be liquidated at a moments notice. The thought that my house is an ATM and whenever I want something I just borrow against my house is the very mindset that got us in all this trouble.

    How liquid is a stock that has lost 50% of its value…you probably won’t want to sell that unless you absolutely have to.

    I am debt free and loving it! I know if something happens to me my family will be ok.

    • says

      @John
      Thanks for sharing your story. I’ve noticed a theme. Those who have paid off their mortgage do not regret the choice. Perhaps there is a lesson there for all of us …

  7. says

    If God leads you to pay off the mortgage, that is no problem at all. The money you were paying monthly toward the mortgage can now go into an invest account. That math works out quite well.

    Say you owed $150k on the home and you paid $1,000/mo with 25 years left to pay it off. In 25 years, the mortgage would have easily cost you $250k with finance charges. If the investment tanks, you still have to pay the mortgage.

    By paying off the mortgage now, you have the ability to invest that $1,000/mo with the added benefit of dollar cost averaging. Even with no interest accumulated, $1,000/mo over 25 years is $300k. But hey, anyone wise or blessed enough to be in that position, will be wise or blessed enough to invest in something that will provide compound interest over that 25 year period. So instead of $300k, they can very easily and conservatively have over $700k.

    Do you pay it off? Let God lead the way based on His plan and purpose for your life, as the original author said.

    • says

      @Tim
      Great point. I think your right that if you’ve made the types of choices that lead you to a place to consider paying off the mortgage then you’ll probably make a wise choice here. I think you make a good point about dollar cost averaging as you invest along the way. That certainly is an advantage.

  8. ROY STROBEL says

    WHAT IS YOUR THOUGHTS ON US REFINANCING OUR HOUSE FOR $100,000.00, PAYING OFF THE CURRENT MORTGAGE OF $56,000.00 AND TAKING THE $44,000.00 THAT IS LEFT AND INVESTING IT IN A PROGRAM THAT WILL GIVE US MONEY FOR OUR RETIREMENT YEARS?

    • says

      @Roy
      The plan seems very good (not knowing a lot about your personal situation). However, the only thing I wonder about is the ‘program’. I hope it is a proven way to earn returns on your investment not some seminar program.

  9. says

    You’ve made some excellent points with this article. Choice A involves much less risk than choice B. I often find that most individuals who are paying down their mortgage are more financially responsible overall. Paying off debt is always a good choice, you can’t go wrong no matter what anyone suggests.

  10. says

    I agree that paying off the mortgage is largely emotional, and wow, does it feel great to be completely debt free. I don’t think I agree with the statement that you’re a good steward whether you pay off the mortgage or not. Yes, you’re trying to get the best return for your money and manage the resources you have to the best of your ability. However, the Bible is pretty clear on matters of debt – it is to be avoided at all costs. That tells me I’m being a better steward when I get rid of my debts and stay debt free.

    I also would say that the argument to keep the mortgage and invest instead almost never comes out mathematically, once you factor in risk & inflation vs. appreciation. You actually lose money on your house over time and the longer you keep the mortgage, the more money you lose.

    Great post!

    • says

      Matt,
      Thanks for chiming in with some great comments.
      I think the stewardship issue depends on the other assets you have. Some people might have the cash/investments to cover the loan and as such it is not a spiritual or emotional burden.

  11. says

    In Indonesia there are currently around 40 fixed rate government bond issues with coupon ranging from 7.0 to 13.5% per annum. I would say that this bond is as good as risk-free. However the coupon will be adjusted to at what price you purchase the bond whether at discount or premium. Secondary market is available so that basically you can purchase and sell the bond as you wish.

  12. Jaspal Singh says

    While I am not a Christian, I agree whole-heartedly with the sound, sensible and very thougtful comments to this very nice article. I also think that the responsible thing to do is to pay off the mortgage. Once it is paid off, it frees up so much more money to (1) allow a person to work less; (2) possibly retire early; (3) invest in other things; or (4) do some charitable good in this world.

    Either way, being debt free giving a person freedom. The money changers and money lenders will always want to keep you in debt. Freedom comes from not being in any debt whatsoever.

    • says

      Jaspal,
      Thanks for the comment.
      I don’t know of anyone who paid off the mortgage and regretted it. That tells us something right there, right?

  13. says

    Well I did both. I invested money…..and…as of tomorrow, we will be debt free. We decided to pay off the last $52K off our mortgage in one fell swoop and be debt free. It feels AMAZING. Now we can use that extra $1581 a month to save and invest. Our lifestyle will not change, other than our savings and investments will go up. That also feels so good. Our home is probably worth in the low $400Ks –in a market that has been impacted. And it feels good to have it free and clear. I am in my mid 40s, we have been in this home 15 years and plan to live here the rest of our lives.

  14. Sandra says

    My husband and I paid off our mortgage last year. We had the exact amount in liquid investments as our mortgage balance (I’m NOT talking about 401ks here). Our liquid investments were for college (kids are not going for 5-7 years). I am a finance professional who works with people who view their house as nothing more than investment. My house is a sanctuary. It’s where I spend time with the people I value most. Every room in the house holds a memory that I cherish. I don’t particulary “cherish” my stock holdings. Anyway, we made the emotional decision to pay off the mortgage after selling the investments. Best decision ever. Every morning when I wake up, I think “I own this house, not the bank”. When I walk down the driveway to get my paper I think “I own this land, not the bank”. If I lose my job, I can bag groceries at Kroger to put food on the table and not worry about losing my house. In the meantime, I have simplified my life and my excess cash flow every month goes entirely to my new investment account which by the way, I have paid half of it back in one year already – I truly believe it as to do with my newly simplified financial situation which makes it easier to focus on goals!

    • says

      Sandra,
      Thanks for sharing your experience. I think that this is certainly an area in finance where the bottom line is not the bottom line. As you mentioned there is a tremendous emotional factor that is often over looked.

Leave a Reply

Your email address will not be published. Required fields are marked *