Should I pay off my mortgage or invest?

Key takeaways

• Homeowners may benefit from borrowing against their home equity at a low interest rate to invest.

• Whether this will be a good idea for you depends on your mortgage rate and specific financial situation.

• Your risk tolerance may determine whether you choose to pay down your mortgage aggressively or, alternatively, take your time with the mortgage and invest any extra funds toward retirement.

Many people view debt as a financial enemy and strive to pay it down as quickly as possible. That strategy is a wise one for high-interest obligations, like credit cards. But when it comes to mortgages, the math is more nuanced.

Unlike other loans, mortgages are considered “good debt,” because they’re tied to an asset — your home — that will (presumably) appreciate. So, some financial advisors believe, it’s not necessarily so important to get rid of it, but rather to leverage it. They tell clients to take out a 30-year mortgage, and for as much as they can borrow (generally 80 percent of their home’s value). Rather than making additional payments or aiming to pay down the loan early, these contrarians say, you should keep it or even increase it, and devote your extra cash flow to investments.

For example, Claire Mork, director of financial planning at Denver’s Edelman Financial Engines, urges clients to borrow as much as they can against their homes for the longest term possible. “Mortgages are the cheapest money anybody could ever borrow,” says Mork. “I think of it as a financial tool.”

Not everyone agrees with that approach. Chris Hogan, a Nashville-based financial coach and author of “Everyday Millionaires,” advises clients and audiences to pay down their mortgages as quickly as possible. “I’m allergic to debt,” he says. “I see debt as a threat.”

So which approach is the best one? And has the recent rise in mortgage interest rates affected the equation? Advocates for both strategies make compelling cases, and the reality is that the right answer for you depends on your tolerance for financial risk.

Assess your finances and risk tolerance

Both strategies are correct in theory, says Ken H. Johnson, a housing economist at Florida Atlantic University. Using leverage — that is, borrowing money to invest, thus boosting your rate of return — is common practice in the professional financial world. On the other hand, there’s much to be said for the liberating feeling of no monthly debt payments,and owning one’s home free and clear. “You can’t go broke if you don’t have any debt,” says Johnson.

Which approach is right for you really depends on how you feel about debt and how comfortable you are with the stock market’s inevitable swings.

“The average person has to fall back to, ‘What is my tolerance for risk?’” says Johnson. “It’s well established in academic research that different people have different tolerances for risk.”

Personal preference isn’t the only variable. Risk tolerance can shift with economic cycles and personal experience, too. In an episode of “All in the Family,” Archie Bunker burned his mortgage papers after he paid off the loan, for example. Archie was old enough to remember the Great Depression, when millions of people had their homes foreclosed upon, and his comfort level with debt reflected those memories.

A new century and a few generations later, homebuyers developed a different mindset. They became accustomed to low mortgage rates, and many are more comfortable owing money on an asset that usually appreciates. So why not stay in debt, and use the free money they have to go to work for them, by investing it?

While proponents of debt and debt-haters have divergent views on using home equity, they agree on the basics of building wealth. Both sides eschew credit card debt, suggest building emergency accounts able to cover at least six months’ worth of living expenses and urge investing for retirement.

For homeowners who already have achieved financial stability, however, the experts espouse very different approaches to tapping the value of your residence.

Evaluating your financial situation

Every person’s financial picture is different, meaning there is no one-size-fits-all answer to whether borrowing to invest is wise.

When deciding on your approach, you will want to look at factors like how much other debt you carry and what your monthly payments on those obligations are. Is your monthly outgo for living expenses and home maintenance stable?

On the positive side of the ledger, how much do you have in savings — or in liquid assets, should an emergency arise?  What are your overall prospects for increasing your income?

Keep big-picture and long-term financial goals in mind. What (if any) moves are you looking to make in the next year? In the next five years? Are you putting aside funds for retirement in sufficient quantities now? These factors can all influence your decision-making.

And then there’s the bigger economic picture to consider.

The stay-in-debt-and-invest-the-rest certainly had a logic to it, when mortgage rates were scraping rock bottom and the stock market was soaring. One big wrench now, in the third decade of the 21st century: Mortgages aren’t so cheap anymore. Their interest rates are getting uncomfortably close to the investment returns you can expect to reap.“If someone has a rate of 6 or 7 percent, that’s about the average return we count on in a moderate-risk portfolio,” says Mork. She advises her clients to max out their mortgages only after diving into their financial situations and their feelings about debt.

Determining your risk tolerance

Risk tolerance is your ability to stomach ebbs and flows in the market, or more directly, your willingness to endure loss. If you can reach your financial goals while continuing to invest, doing so may be a good decision. Conversely, if you absolutely need your assets to remain intact, real estate is traditionally a more stable place to keep equity.

Your personality and financial background may inform your risk tolerance, but so might your age and how close you are to retirement.

Traditional approach: Pay off your mortgage

Hogan advises putting 15 percent of your income toward retirement savings and using excess cash to trim mortgage debt. He sees debt not as a tool, but as an insidious enemy that must be attacked.

“I know this about debt: It brings risk,” says Hogan. “Debt doesn’t care if your kid is sick or if you’re sick or if you lost your job. It just takes.”

Hogan interviewed millionaires for his most recent book, and he discovered a common theme: Many pay down the mortgages early or as quickly as they could, as opposed to carrying the loans to term.

If you must have a mortgage, Hogan advises taking a 15-year loan, because you’ll retire the debt more quickly and pay much less interest than with a 30-year mortgage.

About 38 percent of owner-occupied homes in the United States were owned without a mortgage as of 2021, according to the U.S. Census Bureau. The other 62 percent of homeowners should accelerate the day they make the final payment, argues Hogan.

“When you get that deed to your house and you realize you own it now, it’s a game-changer,” says Hogan. “You get the gift of options.”

Pros of paying off your mortgage

• Interest savings: The sooner you pay off the debt, the less interest you pay overall.

• Better cash flow: Paying off your mortgage eliminates a large monthly expense, meaning you have more cash available for other purposes, including investing.

• Improved credit score: Your credit score tends to go up as you pay down debt, so paying off your mortgage might boost your credit.

Cons of paying off your mortgage

• Less liquidity: If you put all your excess cash into your mortgage, you’re tying it up in an illiquid asset. That makes it harder to access that money for emergency expenses or other purposes.

• Loss of tax benefits: There are some tax advantages related to homeownership, including the mortgage interest deduction. Paying off your loan means losing that deduction.

• Possible prepayment penalty: Some lenders charge a fee if you decide to pay the loan off ahead of schedule. (This is rare, however.)

Alternative approach: Use your home equity to invest

Those more tolerant of risk say homeowners who pay down their mortgages are sacrificing an opportunity to build wealth in their retirement accounts over time. People “feel like they have to pay off the house before they retire,” says Mork. “That’s not always the case.”

A 30-year mortgage comes with pros and cons. On the upside, the payments are low. On the downside, you’ll pay a lot in interest over the life of the loan. Advisors such as Mork say you should take advantage of the low payment on a 30-year loan. Instead of devoting extra money to paying down the mortgage, fatten up your retirement accounts. In this way, you’re viewing the mortgage as a way to maximize savings, rather than as something to be paid off as quickly as possible.

That’s especially true if you managed to refinance when rates were at historically low levels in 2020 and 2021. If you scored a 3 percent rate, there’s little urgency to pay down the debt.

Pros of investing

• Potential for higher returns: Historically, the stock market has returned a bit more than 10 percent on average. While stock performance isn’t a sure thing, if your mortgage rate is less than 10 percent, many folks tend to come out ahead by investing.

• More liquidity: Financial assets, like stocks, bonds, mutual funds and ETFs, are highly liquid, meaning you can sell them easily and use the cash for other purposes.

• Retirement account benefits: If you put money into a retirement account instead of making extra mortgage payments, you might be able to take advantage of perks like employer matching if it’s a company 401(k) plan. Both 401(k)s and IRAs offer tax breaks too — deductions on your contributions, and money growing at a tax-free rate.

Cons of investing

• No guarantees: Stocks are volatile and there’s no guarantee you’ll come out ahead. A bad year or two could put a big dent in your portfolio.

• Tied to monthly payment: For many people, their mortgage payment is their biggest monthly expense. If you invest instead of paying it off, you’ll still have to make that payment. And if you max it out, you’ll have an even bigger payment, which could create cash-flow problems.

Case study: How these homeowners made the decision

Of course, debt is a deeply emotional topic, and even financial professionals who understand the pro-leverage strategy say it can be difficult to put into practice.

Morgan Housel is a Wall Street pro and author of the book “The Psychology of Money,”  Housel and his wife carry no mortgage on their home — a money move he acknowledges is irrational.

“On paper, it’s the dumbest thing you could possibly do,” says Housel. “Even though it’s the worst financial decision we’ve ever made, I think it’s the best money decision we’ve ever made. It’s one thing that gives us a level of independence and autonomy.”

Housel admits they didn’t behave logically on this front — but that sometimes raw emotion overrules cold logic. He and his wife actually celebrated when they paid off their mortgage. “When we did it, it was like, high five, hug each other, this is so cool,” says Housel.

The lesson, says Housel: Maximizing every penny of returns can be emotionally exhausting. “People should not just aim to be rational on a spreadsheet — rational on paper, I think, is not a good financial goal,” says Housel. “People should aim to be reasonable and manage their own financial decisions about what makes them happy, and what helps them sleep at night.”

Should I pay off my mortgage or invest?

On the one hand, paying off the mortgage creates a feeling of security — the knowledge that the roof over your head is yours even if you lose your job or your investment portfolio craters. On the other hand, it could be robbing you of a chance to build wealth. For financial security over the long haul, it’s not enough to be debt-free — you have to take constructive steps to enhance your net worth, too.

Bottom line: There’s not always a right or wrong answer when it comes to deciding whether to pay off your mortgage or invest those extra funds. The answer depends on your financial goals, your personal preference and your appetite for risk. Investing more brings the potential for higher returns, but ultimately, either path can be the right one depending on your circumstances.

Additional reporting by Meaghan Hunt