Pay Off My Mortgage or Invest?

So, you have some extra cash. What should you do with it—start paying off your mortgage or invest it in the market?

Among the 8 Money Milestones, one Milestone is dedicated to either saving for college or paying off your mortgage. This is Money Milestone 7. I regularly get questions about whether paying off a mortgage is the right financial move. Usually, the question is asked in a format like this: 

“Why would someone pay off their mortgage when they could take the money they would put toward additional principal, place it in the stock market, and earn 8%? When you pay off a mortgage, you only gain 5% (or whatever the mortgage’s interest rate may be).”

At first glance, the position makes sense. Why would someone choose 5% over 8%? Who wouldn’t want a higher return? So, keep the mortgage, right?

Not quite. There are some important factors that are not considered in the question. Assuming that a person is already on track with their retirement savings, here are some other factors to consider:

1. Return isn’t everything.

When it comes to financial health, return is not unimportant, but return is not everything. Every financial decision should not be based on potential ROI (return on investment). There are other important factors to financial health, including cash flow, the ability to weather financial emergencies, decreased stress, and increased generosity. Financial health is not always about chasing a potentially higher return.

2. Paying off your mortgage is not absent of a return.

As you pay off your mortgage, you do get a type of return. Making additional principal payments guarantees you will pay less interest. Before making an additional principal payment, review your amortization schedule. Once the schedule has been updated to reflect your payment, review it again. You will see a drop in the total interest owed.

3. Increased net cash flow.

Net cash flow is the difference between a household’s cash inflow (their income) and cash outflow (their expenses). Paying off a mortgage eliminates what is likely a household’s largest monthly payment. The removal of this payment often has a significant impact on a household’s net cash flow. This expanded margin creates greater financial flexibility, an important factor of financial health. 

4. Increased peace of mind.

There is a place for risk in finances. There is also a place for risk reduction in finances.

Not every benefit of paying off a mortgage is financial. One of the significant benefits of being mortgage-free is that it does not have a dollar symbol next to it. Increased peace of mind often accompanies being mortgage-free. Mortgage-free homeowners feel they can better weather a financial emergency and are not concerned about losing their homes should they face a challenging financial season.

5. One of retirement’s largest expenses is eliminated. 

Expenses always need to be managed well. And during a person’s retirement years, expense management only becomes more important. Income is truly fixed. During the retirement years, most individuals will have Social Security plus an amount saved for retirement. For most retirees, additional income outside those sources is not likely. During these years, housing payments can consume up to one-third of a person’s income. This is significant as it reduces financial flexibility. Consequently, paying off the mortgage prior to retirement, eliminates a significant financial burden and increases financial flexibility.

6. Increased capacity to live and give generously.

God has entrusted us with His resources, and we are to use those resources according to His plans and purposes. Often, this is accomplished through generosity. We give so that others can experience the love of God and hear the gospel. We’ve already seen that mortgage-free homeowners have increased net cash flow. This provides them the ability to be more generous with their income.

Paying off one’s mortgage is typically a long journey. It takes sacrifice and discipline. However, the benefits of being mortgage-free are significant. It removes what is typically the largest financial burden a household carries. There is a place for chasing higher returns. But there is also a place for eliminating a mortgage. Assuming that your retirement savings is already on track, paying off your mortgage may be the next smart money move to make.