Having extra cash each month should feel like progress, but for many, it can create a different kind of stress: knowing your money should be doing more, but not knowing where it should go.
Should you pay down your mortgage faster and enjoy owning your home sooner? Or should you invest that money for potentially greater long-term growth? This decision is common because both options have real advantages, and the best choice depends on your bigger financial picture.
To help you move past the indecision, let’s look at the practical pros of each.
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 that, 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 of 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 of 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 that 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 that 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. That way you can free up more of your money before your medical expenses start to build.
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 a foreclosure or having your credit damaged by missed mortgage payments. However, you still have to pay your taxes and homeowners insurance 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%, then you free yourself of needing private mortgage insurance and then you can start investing, should you determine that that’s a more appropriate option for you.
I Can Help You Navigate the Mortgage vs. Investing Crossroads
Deciding whether you should focus on paying down your mortgage vs. investing is one of those “good problems” to have, but it can feel like a bit of a tug-of-war between peace and potential growth. While the math is important, there are several other personal factors, like your timeline and risk comfort, that we’d need to weigh before you pull the trigger.
At Tapparo Capital Management, my mission is to help you make smart, intentional decisions with your wealth. I focus on guiding families through these exact crossroads, and I’ve helped many clients find the right balance between clearing debt and building a portfolio.
If you’d like to run the numbers and see which path offers the best return for your specific situation, give us a call at 978-887-1121 or email andrew@tapparocapital.com.
About Andy
Andrew Tapparo is a fee-only financial advisor at Tapparo Capital Management, a financial planning firm in Topsfield, MA. As a Retirement Income Certified Professional (RICP®), he designs retirement strategies along with sound money management to help clients retire with confidence.
