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Should I Pay Off My Mortgage or Invest the Money [Free Investor Guide]

Should I Pay Off My Mortgage or Invest the Money?

Should I Pay Off My Mortgage or Invest the Money [Free Investor Guide]

Summary: In this article, we will talk about whether to pay off your mortgage or invest the money. Topics also include reasons to invest in retirement first, reasons to invest in the stock market first and when you should pay off your mortgage before investing. 


Choosing where to invest your hard-earned money can be a complex decision. That’s because there are several factors, both personally and financially, that will impact your decision and investment strategy. 

Let’s say you are experiencing a financial windfall, like receiving a big inheritance or tax refund. If this is the case, lucky you! Now the question is, what are you going to do with this extra money? Putting it toward your mortgage to relieve some of the weight caused by interest-earning debt may sound appealing. On the flip side, it may be smarter to invest the money elsewhere. Today, we will help you determine the best place to invest and make your money work for you in the long run. 

Pay Off Mortgage or Invest in Retirement?

This is one of the more common questions when it comes to financial planning. Choosing to hold off on saving for retirement in order to pay off your mortgage may come with huge financial consequences. Keep reading to learn why.

Reasons to Invest in Retirement Before Paying Off Mortgage

Maxing out your retirement contributions should be at the top of your financial planning priorities checklist. I will explain exactly why in the following sections. 

Reasons to Invest in Retirement Before Paying Off Mortgage

401(k) Employer Match 

Aka, free money! If the organization you work for offers a 401(k) employer match, make sure you are contributing at least that much. Otherwise, you will be missing out on free money. Dave Ramsey recommends to invest 15 percent of your income to retirement first, and then work to pay off your mortgage after that. 

Start Investing for Retirement Early 

The longer you invest, the more your money can grow. Waiting to invest in retirement until your mortgage is paid off will cause you to lose time that you won’t be able to get back. Even if you bump up your retirement contributions after paying off your mortgage, you will never be able to make up the time lost. Money invested now has a lot more value than money you will invest five, 10 or 15 years from now. Because investments tend to gain value exponentially, every year you put off putting money toward retirement will set you back tremendously.

Make Compound Interest Work For You

Unlike simple interest, compound interest apples to both loans and money deposited. Basically, it means you are earning interest on interest. Because compound interest is calculated using your entire account balance, not just the original deposited amount. So every year you are making more and more money from your investments. That’s the beauty of compound interest. 

No Taxes on Money Earned 

This is the big differentiator when it comes to deciding where to invest your money. The reason is because you don’t have to pay taxes on the money earned from retirement accounts. So if you plan to max out your IRA or 401(k), then investing will definitely save you money. 

Invest in the Stock Market or Pay Off Mortgage?

After you have maxed out your retirement account contributions, the next question might be where to invest your money now. Whether you decide to invest in the stock market or start paying down your mortgage, there are several factors to consider before moving forward. 

Reasons to Invest in the Stock Market Before Paying Off Mortgage

In the following sections, I will break down the main reasons to invest in the stock market before paying off a mortgage. 

Reasons to Invest in the Stock Market Before Paying Off Mortgage

Building a Liquid Asset

The main reason many investors choose to put their money in the stock market rather than pay off a mortgage is to build liquid assets. Having liquid assets or cash available to you with a click of a button can put you in a better overall financial position. If you decide to pay down your mortgage instead of investing, be aware that your liquid assets will be tied up in real estate and inaccessible until you sell or refinance.

Potential for Greater Returns

While there are no guarantees to secure a better return on your investment through the stock market, historical data paints a pretty clear picture. That is, returns from the stock market have exceeded most guaranteed returns made by paying off a mortgage. 

There are a number of resources out there to see the past performance of the S&P 500, for instance. Tracking stock market performance over the long term will give you a better idea of your expected return. S&P has produced around a 10 percent return, historically. With 7 percent real return and 3 percent from inflation. 

Keep in mind that investing in the stock market should be a long-term strategy, as the market fluctuates up and down. It’s important to allow enough time for the market to recover from downturns. 

If You are Already Investing in an Aggressive Asset Allocation

Let’s say your investment strategy is more on the aggressive side. You should continue to invest more. Aggressive portfolios are customized to produce grains of 10 percent or more. Chances are, the guaranteed return on investment from your home will almost certainly be less than 10 percent. Aggressive portfolios have more to gain, but also more to lose. Based on the direction you are headed, understand the risks associated.

You Have High Income Value

You should also look into investing in the stock market if you make a large income. explains, “When you hold an investment for one year or more, you can pay the dividend tax rate on it. This rate is lower than most of the federal income tax rates. That means taxpayers with a high regular tax rate (22% or more) can ultimately save on taxes by building more wealth through investments instead by increasing their regular earnings.”

Use Inflation to Your Benefit

I’ve talked about inflation and how it works works, along with its impacts and benefits in a recent article. Inflation basically increases prices and decreases the value of money over time. That said, you should be earning a higher salary as you get older. Combine your higher salary with inflation and making a mortgage payment will become easier and easier. You also find that you are able to make regular mortgage payments and invest simultaneously. 

Reasons to Not Invest in the Stock Market Before Paying Off Mortgage

Now that we have covered reasons you should invest in the stock market, let’s move on to reasons not to.  Next, I’ll explain why not to invest in the stock market before paying off your mortgage. 

Reasons Not to Invest in the Stock Market Before Paying Off Mortgage

No Guarantees on Return of Investment

One benefit to paying off your mortgage rather than investing in the stock market is earning a guaranteed return, based on your interest rate. While the stock market has the potential to produce much higher returns, it offers no guarantees. If you don’t feel confident about getting a higher ROI by investing elsewhere, your best bet may be going with a lower, guaranteed return. 

You Must Pay Taxes on Investment Profits

The IRS requires taxes be paid on investment earnings. These tax rates may be beneficial, but only if you make a lot of money and hold investments long-term. If you are able to itemize and deduct interest, using the mortgage interest deduction, there may be a good possibility that investing may cost you more money. 

Invest in Real Estate or Pay Off Mortgage

When it comes to investing in real estate, there is no blueprint for guaranteed success. However, considering the benefits of all your options should make the decision easier. 

Reasons to Invest in Real Estate Before Paying Off Mortgage

In the following sections, I will go over some of the best reasons to invest in real estate instead of paying off your mortgage.

Reasons to Invest in Real Estate Before Paying Off Mortgage

Higher Return Potential

Investing in real estate has the potential to bring in much higher returns compared to paying off a mortgage. Additionally, you won’t be clearing out your entire savings to pay off your mortgage. You’ll be investing less of your money into a rental property, and potentially setting yourself up for higher returns. 

Tax Benefits

There are several possible tax breaks to owning more than one property. You may find additional tax benefits in real estate through an LLC or mortgage interest tax deductions. No matter what you do, it is always a good idea to consult a real estate tax professional to find out the tax breaks you may qualify for.

Cash Flow

Investing in real estate has the ability to produce monthly cash flow, which is a huge draw for many investors. Rental properties may be an excellent source of passive income, especially with a long-term, buy-and-hold investment strategy. 


Buying a rental property gives your asset the opportunity to appreciate in value. Meanwhile, you may be able to sit back and watch your property gain value. 

Diversify Your Portfolio

A possible argument against investing in real estate is that you may be subjecting yourself to more risk. While that may be true in some cases, investing in real estate is a great way to diversify your portfolio, in turn, lowering your overall risk. 

Reasons Not to Invest in Real Estate Before Paying Off Mortgage

Low Risk Tolerance

When considering any type of investment, it’s always important to determine and understand how much risk you are willing and able to take on. Real estate may seem too risky for some investors to want to venture into, which may be a good enough reason to choose to pay down or pay off their mortgage.

Stage of Life

Depending on your age, career, and financial situation, some investments may be more or less risky than others. For instance, if you are approaching retirement and want to have your mortgage paid off beforehand, using your extra cash to do so would make sense.

Get Rid of Private Mortgage Insurance

Paying off your mortgage will eliminate interest payments and PMI. In fact, once you’ve paid off 20 percent of your property’s original purchase price, your lender is required to drop PMI. Each scenario could save you a lot of money in the long run.

When to Pay Down Your Mortgage Before Investing

There are a few instances where you should pay down your mortgage before investing. If your circumstances put you into one of the following, it is recommended to pay down your mortgage first. Whatever you decide to do, make sure to run the numbers to ensure this strategy is the best one for your financial health.

If Your Mortgage Interest Rate is Unusually High

Paying off a mortgage guarantees that you will receive a return on your investment, equal to your mortgage interest rate. So, if you have a higher interest rate, say around six or seven percent, then it may be a better decision to pay down your mortgage.  This will guarantee a return on your investment rather than playing the stock market. 

On the other hand, you may want to consider looking into refinancing a home to lower the interest rate. Refinancing your mortgage creates the option to take money out of your home, using equity, and invest that money elsewhere. This is called leveraging and many successful real estate investors use this strategy to purchase multiple investment properties. 

If You Are Approaching Retirement 

Approaching retirement and still have a lot of your mortgage to pay off? Now would be the time to consider paying down your mortgage as much as possible. This rule of thumb applies to individuals 50 and older. 

Consider a Blended Approach

Creating a diversified portfolio is a fundamental rule of investing. Individuals who put much of their liquid assets into one or two investments are just adding extra risk. Consider using a blended approach by spreading out your investments to minimize risk and maximize potential returns. 

Questions to Ask Before Deciding Where to Invest

Questions to Ask Before Deciding Where to Invest

Lastly, because everyone has their own unique situation, there is no definitive right answer to whether you should pay off your mortgage or invest. However, taking a few minutes to answer the following five questions will be critical in determining the best investment strategy for you. 

  • Can you get a better return?
  • Do you need access to your money?
  • Do you need a guaranteed return?
  • Will you get any tax breaks from your mortgage interest?
  • Do you pay private mortgage insurance?


To conclude, investors should take careful consideration when deciding whether to pay off a mortgage or invest. For some, the peace of mind that comes with paying down debt may be reason enough. Others may seek peace of mind and security through investing in retirement. Or maybe you have maxed out your yearly retirement contributions and want to invest in the stock market for a potentially higher return. 

To learn more about the advantages and disadvantages of paying off a mortgage, check out my recent article here [insert link]. For more information on the pros and cons of paying off a mortgage early, visit another recent article here [insert link].

At RealWealth, we have several experienced investment counselors ready and willing to offer advice on the best real estate investing strategies for you and your financial situation. Become a member today (for free!) and schedule a meeting with one of our expert investment counselors.


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