A group of four friends sitting in a living room discussing whether you should pay off a mortgage or invest The choice between investing or paying off your mortgage can be difficult. Wanting to reach your financial goals but not knowing which is better is a common challenge.

Buying a home can be exciting and stressful, especially if you’re planning to use a mortgage to purchase a home. Because of this, many people want to do everything they can to pay off their mortgage early. We’ve outlined some of the benefits and downsides to paying off a mortgage early compared to investing these funds and continuing to pay off your mortgage over time.

When You Should Choose To Pay Off Your Mortgage

There is the potential to save thousands of dollars by paying off a mortgage early. However, there is a lot to consider when making this decision. The first step is to examine where you are in life.

Is this your first home? Do you have children in the house or are you close to retiring? Did you start your career? Are you planning on moving into a bigger home soon? These are all questions that can help influence your mortgage payment plan.

If you are nearing retirement, paying off your mortgage could be beneficial. When retired and on a fixed income, cash flow is essential and getting rid of a monthly mortgage payment could be a huge boon to your finances. It is also possible that you’re making investments with less risk if you are close to retiring. The return you receive might be less than the cost of your mortgage’s interest rate. In this instance, it would typically be best to put your money towards paying off your mortgage instead of investing it.

Another instance where it is advantageous is if you have a high interest rate. You could start putting more money towards paying off the mortgage, saving you thousands. If paying off your mortgage right away isn’t in the cards for you, another option is to refinance, seeing that the current rates are so low. Refinancing a home mortgage has the potential to lower an interest rate which can save you money over time.

If you’re more of a spender than a saver when you have extra cash, treat paying off your mortgage as a forced savings account so you don’t lose your cash on a bad investment.

Benefits and Downsides Of An Early Pay Off

One of the benefits of paying off your mortgage early is the peace of mind of living debt-free and the increased cash flow each month.

Your mortgage payment (assuming it is a fixed-rate mortgage) is steady and predictable, unlike the stock market. Putting more money towards your mortgage will grow your home’s equity. If you need cash for home improvement projects or college funds, you will be able to take advantage of that equity through a cash-out refinance.

Of course, there are downsides to paying off your mortgage early. While there is peace of mind living debt-free, there is a different kind of security, knowing you can access more cash by tapping into your home’s equity through a mortgage loan.

Homeowners who have paid off their mortgage will no longer be able to benefit from mortgage interest tax reductions. There is also the possibility of your lender charging pre-payment fees, so be sure to ask questions before increasing your monthly mortgage payments.

Additionally, if you end up paying your mortgage and then selling your home, you risk the housing market dropping and having to sell your home for less than what you paid for it.

When You Should Choose to Invest

Needless to say, each person’s financial situation is distinct. You will need to determine what is best for you and your finances, but in some ways, investing your money could have a more worthwhile return than paying off your mortgage.

Investing may be a better option for someone younger, with a lot of time to pay off their mortgage and a low mortgage interest rate. Mortgage interest rates are typically low compared to credit cards, student and other loans, so it’s smarter to prioritize paying off those debts before paying off your mortgage.

The Next Steps

The choice between investing or paying off your mortgage early is a tough decision for many homeowners. You’ll want to look at your financial situation and future goals before you decide anything.

JVM’s Client Advisors are happy to answer any additional questions you may have about potentially paying off a mortgage. We can be reached 7 days a week here, by phone at (855) 855-4491, or by email at [email protected].

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