There’s an ongoing debate about whether or not you should pay down your mortgage or invest first. That is, if you have extra money at the end of a given month, where is it best used?
What you might be surprised to hear is, there is no correct answer. Investing your money will likely leave you will more money in the long haul, and paying down your mortgage will help you get debt-free faster. To some people, having more money is more important, while to others, being debt-free is.
In this post, I’ll go over both sides of the argument so that you can decide for yourself if you’re in this situation.
Should You Pay Down Your Mortgage Before Investing?
Let’s talk about what happens if you pay down your mortgage instead of investing. For simplicity, here are some assumptions:
- You have a $200,000 mortgage.
- The term on the mortgage is 30 years.
- The APR on the mortgage is 4%
- You have $500 per month available to invest or to pay down your mortgage.
Paying Off The Mortgage Early
If you were to pay off your mortgage over 30 years without any additional prepayments towards the principal, you’d pay $954.83 per month, and over 30 years, you’d pay $143,739.43 in interest. That means your total payments are $343,739.43, or approximately 72% more money than your initial loan.
Now, what if you applied the $500 per month towards your mortgage every month? How much money in interest would you save, and how much shorter would you have the loan for?
Paying $500 per month on top of the $954.83 payment would end up cutting your mortgage down from 30 years to 15 years 4 months. It would also lower your interest payments from $143,739.43 to $67.962.61, a savings of over $75,500!
You saved 14 years of 8 months of mortgage payments, but you also freed up $954.83 per month that you wouldn’t have had for that time. This money can now be used to invest with or used for anything else you want to do with it.
The same math could be applied to a 15-year mortgage, though for simplicity, I've omitted it. You can see some clear advantages to getting a 15-year mortgage here.
I’ll go over more math below, but first, I’m going to show you what happens if you invest your money versus pay down your mortgage.
Should You Invest Instead Of Paying Down Your Mortgage?
What if you were to instead invest the money instead of paying down your mortgage? It’s difficult to tell how much money you’d have after investing because investments go up and down. Let’s use a simple assumption and say you invested your $500 per month into an S&P 500 index fund that grows at an average annual return of 9%.
A $500 monthly investment, at 9% return, for 30 years, gives you $922,237.03. This number is massively higher than the $143,739.43 you’d be paying in interest on your mortgage.
But here’s the thing. No investment is guaranteed. You could very easily have even more than $922k, or you could even lose your investment and end up with less.
The tricky part about investing is that there’s no guarantee and that you’re putting your money at risk. So, while you have the potential to have a great amount of money, you also put yourself on the line to breaking even or losing money.
Of course, if you want to invest, check out the highly rated M1 Finance if fully automated investing intrigues you.
More Money Versus Debt-Free
What it boils down to is, do you want to have a chance of having more money at the end of your mortgage, or do you want to be debt-free sooner?
The argument for more money is that more money is more freedom. If you have more money, you can be free to do what you want, including paying down your mortgage later.
If you’re debt-free sooner, you don’t owe money to anyone, and this leads to becoming financially independent at an earlier date, which leads to peace of mind. When you’re debt-free, you are more cushioned against a financial hardship, or if you end up in a situation where you have too much debt and no money to pay it.
Related Post: How Much House Can You Actually Afford
You have to ask yourself, do you want the potential to have more money? Or, do you want to be out of debt? It’s a fair question, and the answer is different for everyone.
The Math For Paying Down Your Mortgage Versus Investing
Some of us love math (me!). If math scares you, or if you have no interest in the math, feel free to skip to skim past this. I won’t be offended! Otherwise, if you enjoy some math and numbers, let’s grab some of the numbers from earlier in this post and talk about them in more depth.
Combining The Two Examples
What if we combined the two examples? What if you paid $500 per month towards your mortgage for 15 years 4 months, and then, for the remaining 14 years 8 months, you invested the $500 plus the $954.83 that was your mortgage payment? How much would you have versus if you invested the entire amount from day 1? You could potentially have $532,558.29 at year 30 versus the $922k that you potentially could have if you invested from the beginning. This still assumes an annual 9% ROI.
Splitting $250 To The Mortgage And $250 To Investing
If you were to split $250 to your mortgage and $250 to invest, you would pay off your mortgage in 20 years, 2 months, and save $51,950.24 in interest payments. This is around $24,000 less savings and 5 years longer payments than if you used the entire $500.
But now what happens is, for 20 years, 2 months, you invest $250, and then you invest $250 plus the $954.83 that was your mortgage payment, and you do the combined investing for the remaining 9 years 10 months that you would have been paying your mortgage. What is the total payout?
In summary, it appears that splitting your money can give you a respectable amount of cash while also paying off your mortgage almost 10 years early.
What’s The Right Answer?
You might be wondering which is the right way to go. Do you invest your money? Do you pay down your mortgage? Do you do an even split?
Most people that I talk to would either invest or split the money, but a small share would solely pay down their mortgage.
That said, the correct answer, in my opinion, is, “It’s up to you.” I know, sorry! It’s a bit of a cop-out of an answer! But it’s true. You must make that decision. What works for one person may not work for another.
I haven’t had a mortgage in several years, but my wife and I did an even split when we did. To some people, that means cutting into potential investment returns, and to others, that means a longer life of debt.
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So, in the end, it’s up to you how you want to allocate your extra money.
If you’re one to invest your extra money, one highly rated place to invest your money is M1 Finance. M1 Finance offers full automation and customization for your investment needs.
Wrapping It Up
The debate whether you should invest your money or pay down your mortgage first will likely continue forever, as the simple answer is, there’s no simple answer. In the end, it will come down to the individual. In this post, I broke down the math to help you determine which method may be right for you.
Which do you do? Do you pay off your mortgage, invest first, or a combination of the two?