Should You Pay Off Your Mortgage Early or Invest?

Deciding whether to pay off your mortgage early or invest your money elsewhere is a tough choice for many homeowners. While there are valid arguments for both sides, there’s no one-size-fits-all solution. My wife and I paid off our mortgage early—about seven years ahead of schedule—and we’ve learned a lot through the process. Here’s a breakdown of the pros and cons of paying off your mortgage early, and how to determine whether it’s the right choice for you.

The Benefits of Paying Off Your Mortgage Early

Let’s be real: How often do you hear someone say, “I wish I hadn’t paid off my mortgage early”? Probably never. That’s because paying off your mortgage comes with some significant advantages.

For most people, the mortgage is the largest monthly expense. It can limit your financial flexibility, preventing you from using your income for other goals like investing or saving. When you pay off your mortgage early, you free up that cash, which can be used for other things like investing, travel, or even just enjoying life without the stress of monthly payments.

Paying off your mortgage also provides a guaranteed return. If your mortgage rate is 4%, paying down your mortgage early is like earning a 4% return on your money—without the risk. It’s a secure, low-risk investment that reduces the amount of interest you’ll pay over the life of your loan.

Additionally, paying off your home gives you peace of mind. Once our mortgage was paid off, we only had a few hundred dollars in utility and living expenses each month. In the worst-case scenario, where we lost all income, we’d still be able to maintain our home with minimal costs. The emotional freedom that comes with owning your home outright cannot be overstated.

The Emotional Side of Paying Off Your Mortgage

Another overlooked benefit of paying off your mortgage early is the emotional aspect. Debt can feel like a constant burden, and living with it can affect your financial decisions in ways you may not fully realize. Many Americans assume they’ll always have debt, which can lead to a cycle of borrowing more and more, making financial decisions based on a belief that debt is inevitable.

However, living without debt—especially your mortgage—feels incredible. When you pay off your mortgage, you’re not just saving money on interest; you’re also freeing yourself from the mental and emotional weight of owing money. This shift in mindset can help you avoid unnecessary debt in other areas of your life, like credit cards or car loans.

Why You Might Not Want to Pay Off Your Mortgage Early

While paying off your mortgage early works for many, it isn’t always the best decision, particularly when it comes to maximizing long-term wealth.

The biggest argument against paying off your mortgage early is the potential opportunity cost. Historically, the stock market has delivered an average annual return of 9-10%, though the inflation-adjusted rate is closer to 6.5%. If your mortgage rate is around 4%, you may be able to earn a higher return by investing extra money in the stock market, rather than paying off your mortgage early.

That said, the stock market isn’t guaranteed to always deliver those returns. If the market takes a downturn, the money you could have used to pay off your mortgage early could lose value, making your decision to invest less appealing. On the other hand, paying off your mortgage early guarantees you avoid paying interest, which is a guaranteed benefit.

Another downside of paying off your mortgage early is the risk of underfunding your retirement. In high-cost living areas, where mortgages are much higher, the money you use to pay down the mortgage could be better invested in retirement accounts, especially if your mortgage interest rate is low. In these cases, it may be more beneficial to contribute to retirement funds first, while keeping a manageable mortgage.

When Paying Off Your Mortgage Early Makes Sense

There are some key situations where paying off your mortgage early is a smart choice. These include:

• Living in an area with lower housing costs: If your mortgage is relatively low compared to your income and you’re not in a high-cost area, paying off your mortgage can be a good way to gain financial freedom.
• Long-term stability: If you plan to stay in your home for the long haul (10 years or more), paying off your mortgage early could provide immense peace of mind and allow you to use that money elsewhere later.
• High-interest mortgage rates: If your mortgage rate is high, paying it off early could save you a lot in interest over time, making it an effective strategy.
• You’re already contributing significantly to retirement: If you’re already putting 15-20% of your income into retirement accounts, paying off your mortgage early can be a smart way to eliminate debt and reduce financial stress.

When It Might Be Better to Invest Instead

On the flip side, there are situations when you might want to reconsider paying off your mortgage early:

• Living in an area with high housing costs: If you live in a region with extremely high housing prices, such as coastal cities, paying off your mortgage early might limit your ability to invest in other wealth-building opportunities.
• Low mortgage interest rates: If you have a very low mortgage rate, the amount you save by paying it off early may not outweigh the potential gains from investing in the stock market.
• Not saving enough for retirement: If you’re not contributing enough to your retirement accounts, prioritizing saving for the future should likely come before paying off your mortgage early.

Final Thoughts: Is Paying Off Your Mortgage Early Right for You?

The decision to pay off your mortgage early depends on your unique financial situation, goals, and where you live. If you’re in a position where your mortgage isn’t a huge financial burden and you have the means to invest in your future, paying off your mortgage early can provide both financial and emotional benefits.

However, if your housing costs are high or your mortgage rate is low, it might make more sense to invest that money into other financial opportunities, especially if you haven’t fully funded your retirement.

Ultimately, it’s about finding the balance between debt freedom and future wealth-building. Carefully consider your priorities and your financial goals before making the decision to pay off your mortgage early.