Should You Pay Down Your Mortgage or Invest the Money?

Preston Rosamond |

The age-old question of whether to pay down your mortgage or invest your money can leave even the savviest of investors scratching their heads. On one hand, paying down your mortgage can provide the peace and comfort that comes with owning your home outright. On the other hand, investing your money has the potential to yield higher returns and build wealth over time. It’s a balancing act between financial stability and long-term growth—and the answer may not be the same for everyone.

Let’s explore the pros and cons of each to leave you with a clear direction on the best use of your hard-earned cash.

What Makes the Most Financial Sense?

When deciding between these two options, you first want to know which option can provide the greatest payoff. In this case, it’s your mortgage rate versus your expected investment return. You can calculate some rough estimates to evaluate which decision would make more financial sense.

Let’s consider an example. Say your mortgage interest rate is 5%. If you estimate, based on your risk tolerance and time horizon, you can expect an investment return of 4%, it would make more sense to pay down your mortgage. Otherwise, you’re potentially throwing away 1%. However, if you are an aggressive investor and believe you could earn 8% on your investment, it would make more sense to invest. 

This may sound simple on paper, but there are a lot of factors at play. And as we all know, even the best predictions aren’t set in stone. It’s important to run a thorough analysis and factor in taxes on investments, mortgage interest deductions, risk, and private mortgage insurance, among other elements of your financial life. An experienced wealth advisor can run all the calculations and do a complete analysis of your unique situation.

The Pros and Cons of Each Option

There are some pros and cons to each which go beyond the raw math. Liquidity is one big pro for investing. You’ll have easier access to it in case of an emergency. However, if you put the money towards your mortgage, it’s gone, for all intents and purposes. The only way to get the money back out is to sell your house or refinance your mortgage.

However, an advantage of paying down your mortgage is your house will be paid off sooner. You will have a greater chance of being able to enter retirement without a mortgage, or at least have your mortgage paid off sooner during retirement. This way you can free up more of your money before your medical expenses start to build. If you invest, your mortgage will be another bill you have to pay while in retirement.

Another benefit of paying off your mortgage completely is decreasing your risk. Once you own your home free and clear, you never have to worry about foreclosure or having your credit damaged by missed mortgage payments. However, you still have to pay your taxes and carry some risk of having a lien placed against your property. 

Choosing a Combination of the Two

For some people, it may make more sense to choose a combination of these two options. For example, if you have less than 20% equity in your property, you may be required to pay private mortgage insurance, meaning you owe additional premiums on top of your mortgage principal and interest payments. 

In this case, even if your mortgage rate is 5% and you can earn 6% on an investment, you may still earn a higher return on your money by paying down your mortgage. Once you pay it down to at least 80%, you free yourself of needing private mortgage insurance. You can start investing, should you determine  investing is a more appropriate option for you.

How I Can Support Your Financial Journey

While this is a high-level overview of the decision-making process, there are several additional factors to consider before taking action. As a financial advisor focused on serving successful business owners and affluent retirees, my goal is to guide you toward making informed decisions about your money. I have helped numerous clients navigate this same decision, and I would be happy to discuss your individual situation and help you calculate the best return on your investment.

Don’t make a hasty decision without first considering all the important factors at play. Contact me by calling my office at 830-798-9400 or emailing to schedule a consultation and learn how I can assist you in making the best financial decision for your unique circumstances.

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About Preston

Preston Rosamond is a financial advisor and the founder of The Rosamond Financial Group Wealth Management, LLC with over two decades of industry experience. He provides comprehensive wealth management and financial services to successful business owners, corporate executives, and affluent retirees who enjoy simplicity and seek a professional to help them pursue their goals. Preston personally serves his clients with an individual touch, a sincere heart, and his servant’s attitude is evident from the moment you meet him. Learn more about Preston or start the conversation about your finances with him by emailing or scheduling.