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Weighing whether to pay off your mortgage or invest comes down to achieving balance. Just like a gymnast must maintain superb balance to avoid mistakes and injuries, somebody who's torn between paying their mortgage and saving for their retirement must perform a delicate balancing act.
If possible, you can and should work toward paying off your mortgage while also investing for your retirement; doing both can help you better prepare for the future. Here, we'll unlock the pros and cons of focusing on your mortgage or your investment portfolio—or embracing a combination of the two.
Paying Off Your Mortgage First
When you're considering paying off your mortgage first and placing less emphasis on investing for retirement, you should start by reviewing your financial circumstances:
- What is the interest rate on your mortgage?
- How much are your monthly mortgage payments?
- How much money have you already set aside for retirement?
- Do you feel financially comfortable?
- How much money do you have in savings?
- How close to retirement are you?
Here are some of the pros and cons of paying off your mortgage before investing for retirement.
- Once you've paid off your mortgage, you'll no longer have to worry about making a monthly mortgage payment. This could give you peace of mind and free up money for other things, including retirement.
- Paying off your mortgage means you'll own 100% of the equity in your home. If you choose to, you can borrow against that equity or sell your home without having to use any of the proceeds to pay off your mortgage.
- Without a monthly mortgage payment, you'll have more money at your disposal to put toward everyday expenses, projects and other financial goals.
- You could save thousands of dollars in interest charged by your mortgage lender. Just keep in mind that if you're not also investing for your retirement, you could be losing out on investment returns that pay higher interest than what you're paying on your mortgage.
- Unlike stocks and other investment products, paying off your mortgage early represents a relatively risk-free return.
- Putting more cash toward paying off your mortgage and funneling less or no money toward retirement could leave you with a paid-off home but little in the way of income once you retire.
- Once you pay off the mortgage, you'll lose the ability to write off mortgage interest charges on your annual tax return.
- Paying off your mortgage early might mean skimping on your emergency fund. Generally, experts recommend that this fund contain enough cash to cover at least three to six months' of living expenses in case of an emergency, such as losing your job or unexpectedly being hospitalized. It's a bad idea to drain your emergency fund to help pay off your mortgage.
- If you dedicate yourself to paying off your mortgage first, you might risk losing sight of paying off higher-interest debt like credit card bills.
- When you pay off your mortgage early, the lender might hit you with what's known as a prepayment penalty. Not all mortgages have this; check to see if yours does.
Investing for Retirement First
Just as with paying off your mortgage first, investing for retirement first delivers both pros and cons.
- When you prioritize investing over paying off your mortgage, you may be able to capture a better return on your money. That's because investing in stocks and similar products carries greater risk (and potentially greater rewards) than unloading your mortgage.
- If you're enrolled in a workplace retirement plan, such as a 401(k), you may be able to take advantage of matching funds contributed by your employer, which is essentially free money that goes toward your retirement (though you'll pay taxes on it when you withdraw it).
- You may put yourself in a more stable long-term financial position by prioritizing investment over a mortgage payoff. This is especially likely if you focus on investments such as an individual retirement account (IRA) that emphasize investing in mutual funds and exchange-traded funds (ETFs) rather than individual stocks, which can be particularly risky.
- Even if you prioritize investing for retirement, you'll still need to make your monthly mortgage payments—so you'll still be working toward paying off your mortgage, just not as quickly.
- If you need quick cash, it's easier to sell stocks, bonds and other investments than it is to sell a house.
- Investing in stocks tends to be riskier than owning a home. You may wind up losing thousands of dollars in the stock market while the value of your house continues to climb. In the end, homeownership is often safer than betting on risky investments. That said, it's unlikely that your home can fund your entire retirement—and you may not want to be forced to sell your home to gain retirement income if you haven't invested enough in your retirement.
- If you jump headfirst into investing, you'll still have to make your monthly mortgage payments (or risk foreclosure).
- An investment-centered strategy may leave you with high-interest debt if you maintain high credit card balances—a burden that may overshadow any gains you enjoy from investments.
- Is the interest rate on your mortgage fairly high? An investment-first approach may prevent you from paying off a high-interest mortgage that'll cost a significant sum over the life of the loan.
If you're having a hard time deciding, remember that the mortgage-vs.-investment decision isn't all-or-nothing. Typically the smartest way forward is to pay off your mortgage and invest in your future at the same time.
- If you simultaneously work on paying off your mortgage and socking away money for your future, you'll be on track to accomplish two long-term financial goals: reducing your debt and building wealth.
- Smart investments can pay off and allow you to put more money toward your mortgage, and a paid-off home means you can put even more toward investments.
- Doing both restricts the amount of money you can put toward other goals and desires, such as buying a new car or saving money for your child's college education.
- When you zero in on paying off your mortgage and investing for the future, you may be taking your eye off high-interest debt from credit cards and loans—debt that can eat away at benefits from a mortgage payoff and investment planning. Keeping high-interest debt to a minimum should be a goal with whichever strategy you choose.
The Bottom Line
Ultimately, the decision to pay off your mortgage, invest money or do both at the same time boils down to your financial situation, your financial goals and your level of comfort with risk. Paying off your mortgage may be safer, but investing could put you in a better financial position as you near retirement. As a result, a hybrid approach is usually the ideal foundation for building a solid financial future.
Throughout the process, continue to pay all your bills on time and keep an eye on your credit health. If your mortgage payment is overwhelming and your credit is good, you may be able to reduce your monthly payment by refinancing your mortgage.