Should I pay off my mortgage early or invest those funds?

August 25, 2020

If you have a good credit rating and a low mortgage interest rate (Google “current mortgage rates”), the decision of whether to accelerate your mortgage payoff or not is a question of your preference and tolerance for risk.

Will you get more than a 3 or 4% rate of return on your investments over time, making it theoretically better to invest the money and keep the mortgage? I expect that you will overall, but maybe not on the “safe” bond portion of your portfolio, because the interest rate you get on your deposits is low for the same reason the mortgage rate you pay is low. Also, if you own your home outright, you have no risk that a bank could take it away from you and your overhead is lower (with no mortgage payment), so you can save more each month. Obviously, before you consider making extra payments on your mortgage, make sure to pay off other higher interest debt like credit cards and student loans.

There are two reasons conventional wisdom is to keep the mortgage:

  1. Most people used to itemize their taxes and could take their mortgage interest as a tax deduction. Since the Trump tax cuts, that has changed. Most people now take the standard deduction and get no deduction for mortgage interest.
  2. Financial advisors and mutual fund companies charge fees based on your invested assets, so if you keep your mortgage and invest more money, they (often the people giving you the advice) make more.

If you keep your mortgage, it is important to make sure your rate is competitive, and refinance if it’s not. And think about when you want to retire. If you can have your mortgage paid off by then, you’ll need less income to be comfortable and secure in retirement.

If you want to accumulate a lot of wealth (who doesn’t?), keeping your expenses low, paying off debt, and investing a large portion of your income into appreciating assets like stocks (as opposed to low interest bonds) while managing taxes is my favorite recipe. It’s a judgement call, and there is no absolute right or wrong answer since interest rates are low, but if you are financially conservative, I’d maintain an emergency fund with enough accessible cash to cover 3–6 months-worth of expenses and then pay the mortgage off. Being debt free is a beautiful thing.