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Should I Pay Down My Mortgage with Extra Money or Invest?

So you have some extra dollars and want to know what to do with it? For the purposes of this article, lets assume “spending it” isn’t an option. What are the benefits if I pay down my mortgage vs investing the extra money? When you evaluate the numbers, it boils down to emotion vs logic.

MortgageLets use the example of Joe, who works in Chesterfield, MO, who has a 4% 30 years, $150,000 mortgage with a payment of 716, and just received a raise of $200 a month that he can use for responsible purposes. Joe has 2 choices, one is to pay down the mortgage with the extra money (paying 916/month) as fast as he can then start saving all of his money. The other option Joe has, is investing the extra $200 in an IRA, making the minimum payment on the mortgage.

The argument for paying down your mortgage with extra money:

  • Paying down on the mortgage will pay off the mortgage approximately 10 years faster.
  • This results in saving over $40,000 vs making the minimum mortgage payments.
  • You pay off your debt faster. For many of us, less debt = less stress and less stress = happier life.
  • Once you pay off the mortgage, then you will start saving for retirement.

The argument for investing the money and not paying down the mortgage:

  • If you invest the additional $200 per month, making just the monthly payment on your mortgage, the extra $200 per month results in $200,000 at the end of 30 years.

The Way the numbers stack up:

Paying down the mortgage Investing
Total Mortgage Payback $217,225 $257,804
Mortgage Balance in 2033 $0 $70,731
Investment Account Balance 2033* $0 $92,408
In 2043 $150,113 $200,903

Conclusion: While using extra money to pay off your mortgage may make you feel better, the more efficient way to invest your extra money, is not by paying down your mortgage, its by investing in the market.

*Assuming 6% return