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Paying Off Your Mortgage vs. Investing: Which Option Is Right for You?

Paying Off Your Mortgage vs. Investing: Which Option Is Right for You?

May 11, 2023

Paying off your mortgage and investing are both important financial goals that many people work toward. On one hand, paying off your mortgage can provide a sense of security and comfort, as you’ll own your home outright and have one less bill to worry about each month. On the other hand, investing can provide the potential for long-term financial growth and the opportunity to realize your financial goals faster.

But which option is right for you? The answer depends on a variety of factors, including your financial goals, risk tolerance, and personal circumstances. In this article, we’ll explore the pros and cons of paying off your mortgage and investing, and offer guidance to help you make the right decision.

What Makes the Most Financial Sense?

Of course, you 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.

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 a more 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 money 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. If you sell, you must pack your belongings and find someplace else to live.

However, an advantage of paying down your mortgage is that your house will be paid off sooner. There is value in peace of mind. 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 increase. If you invest, your mortgage will be another bill you have to pay while in retirement.

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 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. Also, it is advantageous in the early years of a mortgage to put more money in because it lessens the overall interest you pay throughout the life of the loan. However, some lenders charge mortgage prepayment penalties. Check your loan contract; if you are charged a penalty, at least it is tax-deductible as mortgage interest.

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.

Learn How We Can Help

While the above guidelines provide a foundation for making a decision, it’s essential to consider other factors and incorporate them into your overall financial plan before taking action. At GLH&C Financial Services, we have extensive experience working with individuals who face these challenging decisions. As a wealth manager, I specialize in helping clients navigate complex financial choices and can assist you in calculating the optimal return on your investment based on your unique circumstances. 

To learn more about how I can help you make an informed choice, email me at or give me a call at 916-276-8677 to see if I am the right fit to help you pursue your ideal financial future.

About Jim

James Callens is a financial advisor at GLH&C Financial Services, a full-service, comprehensive wealth management firm. Jim has over 30 years of experience in the financial industry and uses his extensive resources and knowledge to help his clients experience simplicity and clarity in their financial lives. Jim spent more than 20 years working for GE Financial Advisors, both in its insurance services department and as a regional manager and financial advisor. He took part in GE’s Six Sigma Quality Training program and completed the National Association of Life Underwriter’s four-year LUTCF course. Jim also earned his certificate in financial planning from the University of California at Davis. In 2011, Jim combined his own firm, Callens Financial Group, with GLH Financial Services, creating GLH&C Financial Services, so he could provide even more value to his clients. 

Jim lives in Folsom, California, with his wife, Melissa, and his four children, Jacob, Kristen, Grant, and Andrew. Together, they enjoy outdoor activities like kayaking, bicycling, and vacationing at Lake Tahoe. To learn more about Jim, connect with him on LinkedIn.