Should You Pay Off Your Mortgage Early or Invest? The Math Reveals the Answer

One of the most frequent questions I hear is, “Should I pay off my mortgage early or invest the extra money?” While this can be a deeply personal decision that depends on your goals, comfort level, and risk tolerance, I’m here to break it down mathematically. By understanding the numbers, you’ll have a clearer picture of which option makes the most financial sense for your situation.

If you're short on time and want the quick answer: No, you really shouldn't pay off your mortgage early. But let’s dig into the reasons why and consider some factors beyond just the math.

Is All Debt Bad Debt?

Before we dive into the math, it’s important to understand the concept of "good" and "bad" debt. Many financial experts, including personal finance gurus, advise paying off all debt as quickly as possible. However, not all debt is created equal.

• Bad debt: 

  • Credit card balances, high-interest personal loans, and payday loans. These forms of debt have high interest rates, providing little to no financial benefit and often trapping people in cycles of repayment.

• Good debt: 

  • Mortgages are considered good debt because they enable you to acquire an appreciating asset—a home. Over time, homes generally increase in value, and a mortgage allows you to own that asset while paying relatively low interest compared to other forms of debt.

In a previous blog, I argued that a house isn’t necessarily your biggest investment—rather, it’s your greatest leverage tool. You can read more about that perspective here, but in short, a mortgage allows you to leverage debt to purchase a valuable, long-term asset while enjoying the benefits of lower interest rates. So, is it worth rushing to pay off this "good" debt, or could your money be better used elsewhere?

Mortgage vs. Personal Loans: How Does Interest Compare?

Let’s first look at how mortgage interest rates compare to other common debt types:

• Mortgage rates: 

  • Historically, U.S. 30-year fixed mortgage rates have averaged 7.74%. At their peak in 1981, they reached 18.63%, and at their lowest in 2021, they dropped to an incredibly low 2.65%. These rates make mortgages an attractive form of debt, especially when compared to other high-interest loans.

• Personal loans:

  • These carry an average interest rate of 13.26%, making them much more costly.

Mortgages allow you to leverage debt to acquire a long-term appreciating asset, but does that mean you should pay them off faster?

What Happens If You Pay Off Your Mortgage Early vs. Invest?

Let’s take a look at two common scenarios: paying off your mortgage early versus investing extra money instead.

Scenario 1: Paying Off Your Mortgage Early

Let’s assume you have a $350,000 mortgage with a 6% interest rate and a 30-year term. Your monthly mortgage payment would be around $2,328. Now, if you add an extra $1,000 per month to your payments, your mortgage would be paid off in just 13 years, saving you 17 years of interest payments.

Here’s how the numbers break down:

• Total principal paid: $350,000

• Total interest paid: $197,000

• Total paid amount: $547,000

Want to calculate this on your own? Use this Amortization Tool!

By paying an extra $1,000 a month, you’ll save about $200,000 in interest and have your mortgage completely paid off in less than half the time. Once it’s paid off, you could invest the $3,300 per month (your previous mortgage payment plus the $1,000 extra) for the remaining 17 years. Assuming a 10% annual return on investments, you would have:

• Investment ending balance at Year 30: $1,605,570

• Net after interest: $1,408,570

Scenario 2: Investing Instead of Paying Off Your Mortgage Early

Now, let’s consider the alternative. What if, instead of paying extra on your mortgage, you invest that $1,000 a month right from the start?

Here’s how it plays out:

• Total mortgage paid (with interest): $755,000

• Investment ending balance at Year 30: $1,973,928

• Net after interest: $1,568,928

In this scenario, even though you paid off your mortgage more slowly (and paid double the interest), you end up with $160,358 more in your pocket by investing the extra money instead of putting it toward early mortgage payments.

Want to run different numbers? Use this Time Value of Money Calculator!

What Would You Do With an Extra $160,358?

This is where the decision becomes personal. Imagine what you could do with an extra $160,358. Whether it’s funding a dream retirement, paying for your children’s education, or making a large charitable donation, that extra cash could significantly impact your financial future.

While paying off your mortgage early sounds appealing because it feels safer, the math favors investing that money for long-term growth.

Other Factors to Consider

Before making your decision, here are a few additional factors to weigh:

• Risk tolerance:

  • Investing in the stock market comes with risks. Are you comfortable with market volatility, or would you prefer the security of a debt-free home?

• Inflation:

  • Historically, mortgage rates have been lower than inflation, meaning your debt burden becomes smaller in real terms over time.

• Tax benefits:

  • Depending on your situation, the mortgage interest deduction could reduce your taxable income, making your mortgage more affordable than it appears.

• Liquidity:

  • Investing gives you flexibility with liquid assets that can be accessed in case of emergencies, while paying off a mortgage locks your money into home equity, which requires refinancing or selling to access.

Conclusion: What’s the Best Move for You?

Personally, I prefer to follow the math, and this is why I don’t make extra payments on my mortgage. By investing the extra funds instead, I have more assets working for me in the long run.

However, the best choice depends on your goals and comfort level. If having a mortgage keeps you up at night, paying it off might give you peace of mind—even if it means sacrificing some future growth.

But before you make a final decision, I encourage you to explore your financial options and think about how you can leverage your money to achieve your personal goals.

Curious about how property management software can streamline your real estate investments? Check out HELM Property Management Software or get in touch for personalized advice.

Key Takeaways

• Paying off your mortgage early can save you interest, but investing instead can lead to significantly higher returns.

• You could end up with $160,358 more in your pocket by investing extra funds rather than paying off your mortgage faster.

• Consider other factors like risk tolerance, inflation, and tax benefits when making your decision.

Disclaimer: The information provided in this blog is for general informational purposes only and does not constitute legal, financial, or investment advice. HELM Property Management Software, LLC does not provide legal, financial, or investment consulting services. Real estate investing and property management involve risks, and laws vary by state and municipality. Readers should conduct their own research and consult with a qualified attorney, accountant, or financial professional before making any real estate, financial, or property management decisions.

Nothing in this blog creates an attorney-client, financial advisor-client, or other professional relationship between the reader and HELM Property Management Software, LLC. Additionally, this content is intended for U.S. audiences, and legal or financial regulations may differ in other jurisdictions.

HELM Property Management Software, LLC makes no warranties or representations about the accuracy, reliability, or completeness of the information provided. While we strive to keep our content up to date, real estate and financial regulations change frequently, and we are not responsible for outdated or incorrect information. Any mention of third-party services, products, or companies does not constitute an endorsement, recommendation, or guarantee of their services.

By using this information, you agree that HELM Property Management Software, LLC is not liable for any losses, damages, or legal consequences resulting from decisions made based on this content.