As you continue through your financial journey, you may be wondering if you should pay off your mortgage or invest.ย Depending on what stage of life you are in, you may be leaning one way or the other.

## Understanding Your Mortgage

Before we make a decision, let’s take a deeper look into what we are paying for with a mortgage. A look at our interest rate, monthly payment, and the amount of time we are paying for a loan will determine how much we actually pay.ย I’m going to warn you, this post is math intensive, but I will wrap it all up in an easy to understand format at the end.

If you would rather watch the animated video explaining this question, check out the video below and **please subscribe** to my YouTube channel!

For my readers out there, lets start from the top:

To begin, let’s look at a $200,000 loan.ย For an interest rate,ย let’s assume you have a great rate of 4% over a period of 30 years. With these figures, our mortgage will look like the following:

### Mortgage = $200,000 at 4% for 30 years

Monthly Payment = **$955 base** – *not including taxes, possible PMI, etc.*

Total Paid After 30 Years = **$343,739ย **

So if we do not make any extra payments, we would have spent an extra **$143,739** in interest to the bank for that loan.

## โUnderstanding Investments

First and foremost, not all investments are the same.ย I have described this more thoroughly in my related article:ย Exposing The Mutual Fund Industryย For this example, let’s assume we decide to invest in an S&P Index Fund (great choice!).ย Historically, the S&P has averaged about 8% per year.ย With that being said, let’s do the following calculation based on compound interest.

### Investment = $955 a month, for 30 years at 8% interest

Monthly Investment = $955 = $11,460 a year

Total Investment After 30 Years =ย **$1,402,083.65ย **

## โExtra Money Towards Mortgage Scenario

Now, this is not apples to apples.ย The original question is if we should neglect retirement and pay off our mortgage first.ย Let’s dig further into this scenario.ย Let’s change the scenario and assume we plan to pay off our mortgage early. Assume we are able to pay our mortgage off in 15 years instead of 30.

### Mortgage = $200,000 at 4% for 15 years

Monthly Payment = **$1479 base** – *not including taxes, possible PMI, etc.*

Total Paid After 15 Years = **$266,288ย **

After 15 years, we would have paid,ย **$66,288ย **in interest to the bank.

Obviously paying down our mortgage quickly has an impressive impact on the amount of interest we pay to the bank.ย By cutting our mortgage time by half, we were able to pay $**77,451ย **less in interest on our loan.

In this scenario, we increased our mortgage payment by $524 a month and cut 15 years off our loan.ย By doing this, we saved $77,451 in interest.

## โInvest The Extra Instead Scenario

In the above scenario, we paid an extra $524 a month to save $77,451 over the life of the loan.ย What if we had invested that $524 a month for those 30 years instead of reducing our mortgage time? Let’s see how that impacts our investments.

### Investment = $524 a month, for 30 years at 8% compound interest

Monthly Investment = $524 = $6,288 a year

Total Investment After 30 Years =ย **$769,310.82 after 30 years**

So if we did not pay extra on our mortgage, we would have paid an extra $77,451 in interest over the life of the loan.ย However, if we used that extra money to invest, we would have made **$184,391.09** after the first **15 years**.ย This amount would have compounded to **$769.310.82** after the full 30 years.

## โApples To Apples

The final scenario involves us paying our mortgage off in 15 years and not contributing to retirement during that time.ย After the 15 years, we will invest the full $1,479 a month into retirement for 15 years to see where we end up.ย This is the true apples to apples test.

### Investment = $1,479 a month, for 15 years at 8% compound interest

Monthly Investment = $1,479 = $17,748 a year

Total Investment After 15 Years =ย **$520,447.38 after 15 years**

## โSo Should You Pay Off Your Mortgage Or Invest?

1st Scenario = Delay retirement and pay off the mortgage early (15 Years) and then invest heavily for 15 years = $520,447.38

2nd Scenario = Payoff Mortgage in 30 years, and invest a smaller amount for 30 years = $769,310.82

The clear answer is to invest first.ย By delaying your retirement and focusing on your mortgage, you are giving up way more than you are gaining.ย By investing a smaller amount for a longer period of time, after the 30 year period, you would be upย **$248,863.44**ย versus delaying retirement. Compound interest is amazing and it works much better with time.

## โThe Best Answer!

Where does this all fit in? The best advice I can give you is this:

### Phase 1 – Build A Budget** –ย Budget Article Hereย ย (GET FREE BUDGET PRINTABLES HERE!)**

**Phase 2 – Save $1,500 – $2,000 for Emergencies**

### Phase 3 – Pay Off Your Debt (*except mortgage)ย ***Debt Payoff Article Here**

**Debt Payoff Article Here**

**Phase 4 – Have Cash Reserves For 6 Months Of Expensesย Side Hustle Article**

**โPhase 5 – Put 18% Of Your Income Into Retirement|Investments**

### Phase 6 – Save For Specific Plans (i.e. kids college, elderly parents etc.)

### โPhase 7 – Pay Off Your Mortgage ASAP!ย Pay Off Mortgage Article

### Phase 8 – Build Even MORE Wealth

## โWrapping It All Up

As you can see from the above strategy, due to the power of compound interest, retirement should be started before you pay extra towards your mortgage.ย Start that ball rolling on your retirement by setting yourself up at 18% of your income.ย By investing this amount, you are giving yourself a rock-solid retirement in just about any scenario.

You do not need to go crazy over the 18% if you still have a mortgage.ย If you are able to put the 18% away, put any extra money towards your mortgage to pay it off early!ย Win-win! There is certainly something to say for not having a mortgage payment.ย The security that comes from that is unmatched.ย It gives you the freedom to know that if you lost your job, you wouldn’t be kicked out to the streets.ย You would still be able to provide shelter for your family.

So to answer your question, you should invest first, up to 18%, andย *then* pay off your mortgage early.ย By doing this, you will be able just about anything that life throws at you.

Thank you for taking the time to read this article and if you could do me a couple of favors I would appreciate. First, please subscribe to my new YouTube channel overย Here!ย Second, please subscribe by email below – I have some free budget printables coming out in the near future and I want to make sure you get them!ย Until then, keep at it my friends, you work too hard to be this broke!ย If you still need your free budget printables, get them here!

-Ryan

Susie QWell written. The math looks clear to me, but I’m a math geek. I’m not sure your comparison is quite apples-to-apples. the interest savings is a risk-free return on your money whereas the investment returns on the S&P 500 index fund are risky. Take a look at my post on pre-paying student loan interest for a different perspective. https://financialiqbysusieq.com/you-have-some-savings-whats-next-part-3/

RyanFair assessment Susie, however I would argue that putting money into a home also is not risk free. Housing bubbles and the potential depreciation is also a factor. I think the biggest risk of all is not preparing for retirement until it is too late.

financialiqbysusieqYou are absolutely right! Buying a home is risky and expensive. But, it is already a sunk cost in that you will own it whether you pay off your mortgage or put money away for savings. It is also very risky to not be prepared for retirement. My point was just that readers should be aware that an investment in the S&P 500 or other financial instrument is not risk-free, whereas paying off your mortgage (once you already have it) is. Unless the interest rate is below the risk-free rate (e.g., a US Treasury) or above the average return on the S&P 500, the decision is a function of each person’s risk tolerance and not quite black and white. (To be clear, when I wrote the first draft of my post on the similar topic, I didn’t consider the risk aspect either. It is a tricky nuance.)

Morgan ONice article as this is something that I think people often wonder about. Another area of interest is if you even need a mortgage. Many young people or retirees are now weighing the advantage of even carrying a mortgage as opposed to renting and using any differential savings to keep free if debt. Do you have thoughts on this?

RyanThank you for the nice comment! Yes, I agree that buying may not be in everyone’s best interest. Interestingly enough, I previously wrote an article about this exact idea, https://arrestyourdebt.com/2018/10/06/is-renting-a-waste-of-money/. It turns out, renting may be the best way to go!

OurtrialbyfireThis is always one that gets us! I think paying off the mortgage early would just FEEL better overall. We decided to make sure we get to our savings rate in check and then everything extra will go towards the mortgage.

RyanI completely agree! The feeling of freedom that comes with a paid off house is unmatched! However, the danger of neglecting retirement is a real threat.

MelodyWe definitely struggle with this balance. We want to retire early and not have a house payment! But at 39, we feel like We need to invest to catch up from earlier years of not investing as much as we โshouldโ have. Such a dilemma!

Thanks for the article, though, as it did make me feel slightly better about the decisions we have made on our journey.

RyanI’m glad I could add some value to you Melody! I agree if you’re not investing 18% yet I would do that first before tackling the house.

I’m with you though, the thought of no mortgage would be the most freeing feeling ever!

Eelis VatanenWhen mortgage interests are low, always invest first.

When mortgage interests are high, pay mortgage off first.

Also, if mortgage interests or home prices are high, look at renting.

If mortgages used to be high and you’ve paid off mortgage a lot, and then interests drop -> remortgage and release capital to investments.

RyanGood points and guidance Eelis!