Should I Pay Off My Mortgage or Invest the Money

*This post has been reviewed by an Illinois Registered CPA. However, when making important financial decisions, it's best to speak with your financial advisor.

Last Updated on August 31, 2022

Paying Off Mortgage or Investing the Money

You might have earned some extra money if this has been a good year for you. In this case, there might be some financial decisions you want to make, or maybe even move to another city.

Have you asked yourself if you should pay your mortgage or invest the money? You need to ponder things carefully. There are advantages and disadvantages to both options. Which one should you choose? Let’s see the pros and cons of each option.

Should I Pay Off My Mortgage or Invest the Money First – Pros vs. Cons

Both of these choices can benefit you. If you pay off your mortgage, you will have tackled your biggest debt. You will save money by avoiding interest on future mortgage payments. If you invest the money, you put your cash to work. You might enjoy considerable returns depending on your investment. Here is a quick overview of each decision’s main pros and cons.

Pros and cons of paying your mortgage first

Interest is among the main advantages of paying your mortgage first. You save money by avoiding more interest over the years if you pay off your mortgage earlier. Yet, there is also a downside. If you pay earlier, you might incur prepayment penalties.

These depend on the mortgage you have and the lender. The charge represents a percentage of the debt amount you still have to pay. It can be anywhere between 1% and 5%.

Paying Mortgage First
Pros	Cons
You get rid of one of your significant debts	You might have less money for investing
This helps avoid high interest over time	Early repayment charges may apply
You gain more peace of mind with fewer debts	You might need the money later for other purposes (e.g. medical bills)

Pros and cons of investing your money

Investing your hard-earned money could be an excellent financial decision. If you choose a good investment opportunity, you could enjoy great results. It all depends on when you invest and what you invest in. Yet, investments entail risks. When investing in any asset, make sure you’re aware of its associated risks.

Investing Your Money
Pros	Cons
Can bring significant returns	Entails risks regardless of the investment type
Might open the way to financial freedom	Requires thorough research
Could help you fix your credit fast by using the profits you generate from your investment	Means work in the long term (checking your returns, reinvesting the money, etc.)

Is It Better to Pay off Your Mortgage or Save Money for Future Needs?

If you already have some extra cash, you might want to put it aside. You probably won’t invest if you want to secure this money. Going for something more traditional like a savings account might be safer. Saving your money for future financial goals can be an excellent choice. You might want to buy a house or go to college. Having some money for these hefty expenses is crucial.

If you decide to open a savings account, do your research. Look for one that benefits you the most. This might mean going through a few options. Check out each account’s terms and conditions. There are three main aspects to look for

• High-interest rates

You want an account that helps you earn more money as time passes. For this, your savings account needs to provide a high-interest rate.

• Low maintenance fees

Low maintenance fees are also desirable. You won’t want to spend much on these. Accessibility is also important.

• Good accessibility features

You probably want to be able to access your account at any time. So, you need one that offers user-friendly internet banking tools. You can also connect your savings account to famous budgeting apps such as

1. Mint
2. Mvelopes
3. YNAB

These apps can help you automate payments. You will be able to send money into your savings account or digital envelopes in an instant. Once you get paid, the app makes the transfer. You just have to choose a date to schedule the payments.

It’s also possible to do this for any other recurrent payments. You can streamline your mortgage payments and use these apps to pay your bills. Besides all these, budgeting apps’ primary purpose is to help you budget. Let’s take a quick dive into this topic.

Budgeting can help you achieve different goals. By budgeting you can:

1. Make sure you have money for your essential expenses.
2. Save money for different personal or financial goals (college, investments, etc.).
3. Avoid penalties by paying your bills and mortgage on time.

How to maximize your saving by budgeting

Budgeting might be your key to financial freedom. This smart way to manage your finances can help you fix your credit fast. Budgeting can also tackle the dilemma of why you can’t save money. Are you wondering what budgeting strategies are best for saving money? There are different options. Here are some examples.

Priority budgeting is a flexible budgeting strategy that lets you focus on what you need to buy. Unlike other, more rigid budgeting methods, with this one, you follow a few simple steps

1. Set your priorities.
2. Divide your budget into necessities and priorities.
3. Assign a strict budget for each category.
4. Follow this budget for at least one month. Adjust it monthly if your priorities change.

Here is a quick example of how this strategy might look in real life. Let’s say your monthly salary is $6,000 and your priority is to save money. For this reason, much of your income goes to savings. The remaining amount will go toward the other monthly expense categories.

Priority-based Budgeting Plan
Available budget	$6,000
Priority One: Savings	$1,700
Priority Two: Mortgage	$1,300
Essential spending	$2,000
Non-essential spending	$1,000
Remaining amount	$0

The aspect you want to focus on while budgeting is creating a savings fund. Therefore, you should strive to put aside as much as you can for this goal. Then, you can focus on the rest of your priorities, such as your mortgage. Afterward, cover your essential expenses. These are things you can’t live without, such as

• Bills
• Food
• Gas
• Clothes

Finally, you can use the remaining budget for non-essential expenses. Here, you can include anything from subscriptions to entertainment and eating out.

The digital envelopes system is a popular budgeting strategy that also follows the same lines. You create digital envelopes (separate expense lines) for each category. That is where budgeting apps come in handy. They help you get quick access to the allocated money in each envelope. You can also set up notifications. The apps will let you know when you’re approaching the spending limit for a particular envelope.

The 50-30-20 budgeting strategy is another helpful strategy. You have to save 20% of your monthly income. 50% of what is left will cover your necessary spending. You can use the rest (30%) however you prefer.

Another strategy to save money, or at least make sure you don’t incur penalties, is the half-payment method. You can rely on this method to pay your mortgage or bills. You should save 50% of your payment (for bills, mortgage, etc.) from each paycheck. If you get two paychecks per month, this means 100% of the necessary amount will be available when you need it.

What to Consider If I Want to Pay off My Mortgage First

Paying your mortgage instead of investing your money might make sense. To realize if this is the right solution, you must ponder a few things. First, figure out how much interest you’re paying per month. Then, calculate how much you would pay by the time you pay off this debt in full.

For this, you’ll need to crunch some numbers. Check out your loan terms. See how much you’ve paid so far in interest. If necessary, contact your loan provider. They can provide you with more information on your interest rate. This can fluctuate depending on the market. You will need to make an average to see how much you would pay over the life of your loan.

For example, this calculator shows that a $180,000 house comes with a monthly payment of $1,015 if you manage to pay a 20% down payment first, which is $36,000. From the $1,015 payment, $830 is the principal plus interest and $66 is the homeowner’s insurance. The other $119 is for property taxes.

This type of estimation can help. Compare your potential investment return to the financial advantage of paying your mortgage earlier.

If you realize your rate increased over the past few months, you might want to focus on your mortgage. Paying off the entire or most of this loan means wasting less on interest. But also consider the early payment fee the lender might charge you if you knock out your mortgage earlier.

What are the other downsides of paying off your mortgage earlier? Here are a few potential disadvantages.

Missing out on investment opportunities

Good investment opportunities might come your way in the future. If you use all your cash for your mortgage, you might not have any money left to invest. Keep some of it if you don’t want to let good opportunities slip through your fingers. If you managed to save money or got a lump sum, use most of it for the mortgage payment but consider keeping at least 20% to invest.

The need for liquidity

Prioritizing your mortgage can leave you with no more liquidity (cash). This might make you miss lucrative investment opportunities. Additionally, liquidity is also crucial for emergencies. You never know when you need money for medical expenses.

You might want to move to a different city or help a friend or family member with their debt. All these require cash. If you no longer have it, selling your house to get it is not easy. That is also why having an emergency fund is important.

How Can You Pay Off Your Mortgage Earlier?

If you want to pay off this loan earlier, you can ask for accelerated payments. This strategy allows you to pay off the loan faster by shortening its term. Accelerated payments mean paying more than the agreed monthly payment per month.

To reduce your interest, ask for the extra cash you send to apply to your principal. You can also make accelerated payments by changing the frequency. Instead of paying monthly, you can choose weekly payments or two monthly payments.

What Should I Consider If I Want to Invest My Money?

Should I pay off my mortgage or invest the money? You’ve probably asked yourself this while weighing investment opportunities. First, you need to understand that investments are risky. Then, you need to determine how much you’re willing to risk.

Are you ready to lose money if the investment doesn’t bring good results? The best-case scenario is not losing anything. But some assets, such as stocks and cryptocurrency investments, can be volatile. You could lose a large part of your investment amount, but you could also multiply it fast.

To understand the nature and risks associated with each investment, do your research. Don’t invest in an asset you don’t understand. Also, don’t rush to invest in something under pressure or on the spur of the moment. Take your time to analyze more investment options, such as

• Stocks
• Bonds
• EFTs
• Real estate investments
• Mutual funds

Calculate how much you could gain as returns for each type of investment. Then, compare this amount to how much money you save on interest by paying off your mortgage first. This way, you will see which option makes more sense for you.

Frequently Asked Questions (FAQs)

Should I pay off my mortgage or invest the money in stocks?

Stocks are good investment options if you’re willing to take risks. The stock market can be volatile. Yet, this can also work to your benefit if your stocks increase in value. Study the types of stocks and their expected returns before investing in any.

Is it better to pay off your mortgage or save money in the bank?

A savings account enables you to have an emergency fund. It’s always useful to have one and be prepared for the unexpected. Paying your mortgage earlier can help you save money on interest. You might want to compromise. Use most of your money for the mortgage but also keep some in the bank as a buffer.

What low-risk investments can I choose?

Some assets have lower risks of losing money. At the same time, they bring lower returns. If you’re not a risk-taker, you’re probably better off with this type of investment. Low-risk investments include things such as

• Government bonds
• Savings accounts
• Gold
• Real estate investments

Sources:

Can I be charged a penalty for paying off my mortgage early? Consumer Financial Protection Bureau. (n.d.). Retrieved June 13, 2022, from https://www.consumerfinance.gov/ask-cfpb/can-i-be-charged-a-penalty-for-paying-off-my-mortgage-early-en-204/

Doyle, K. (2022, March 21). Best and worst monthly maintenance fees at 12 top banks. GOBankingRates. Retrieved June 13, 2022, from https://www.gobankingrates.com/banking/banks/best-worst-monthly-maintenance-fees-banks/

Accelerated payment (explained: All you need to know). Definition.Zone. Retrieved June 13, 2022, from https://definition.zone/accelerated-payment/#:~:text=%20Understanding%20Accelerated%20Payment%20%201%20An%20%E2%80%9Caccelerated,off%20earlier%20than%20the%20expected%20term…%20More%20

Treece, D. D. (2022, June 30). Prepayment penalty: What it is and how to avoid one. Forbes. Retrieved August 1, 2022, from https://www.forbes.com/advisor/mortgages/prepayment-penalty-what-it-is-and-how-to-avoid-one/

Friedberg, B. (2019, March 5). Best National Banks of 2022. ConsumerAffairs. Retrieved August 1, 2022, from https://www.consumeraffairs.com/finance/banks.htm