Should I Pay Off My Mortgage Early or Invest in Stocks? | The Answer is Clear!

The dilemma: pay or invest watch from 0:00

A lot of people have this question, and it's a very good question: should I pay off my mortgage early or invest? So the situation goes like this. You pay all your bills, and at the end of the month you have extra money left over. Well, first I just want to say congratulations, because if you're in that situation, then you are already better off than 64% of Americans that live paycheck to paycheck. Now, in this situation, you want to be financially responsible, you want to be a financial adult, and you want to know what is the better option. So first of all, I want to be practical, I want to be realistic with you, and I'm just going to say this bluntly, and I'm not trying to, I'm not even trying to be funny.

If you're not a good investor and you don't plan on becoming one, don't lose your hard-earned money trying to get fancy and invest in things that you don't understand. Just use your extra money to pay off your mortgage early. That's going to be a guaranteed, I mean, that's going to be a sure thing, that's going to be a guaranteed win for you. Nobody can screw that one up. It's going to be an automatic victory. If peace of mind is your priority, then just pay off your mortgage early. It's not going to be worth the anxiety. But if you want to know what's technically optimal from a financial perspective, then let's dig a little deeper.

Mortgage interest as return watch from 1:24

So here's what you need to know: the interest rate on your mortgage, that's going to be a key factor. So I'm going to give you an example. Let's say the interest rate on your mortgage is 3%. If you send in extra money to pay down your mortgage early, then you're basically going to be earning three percent on the money that you send in, in this example. So for example, let's say that you have an extra $100 just laying around. You send in that extra $100 to pay down your mortgage. If the interest rate on your mortgage is three percent, then you're gonna save three dollars in interest. A dollar saved is a dollar earned, so essentially you earned three dollars with that one hundred dollars.

Calculating the best return watch from 2:08

Now let's say that you're thinking about the alternative. You're thinking about using the extra $100 that you have to invest it, rather than sending in that $100 to pay off your mortgage early. So if you're thinking about using that $100 and investing it instead, then you need to earn more than three percent on your money to come out ahead. Otherwise you would have been better off just taking that $100 and using that to pay down your mortgage, because you would have got a rate of return of three percent. So basically, if you're going to invest your money, then you need to get a rate of return on your investment that is greater than the interest rate on your mortgage, and keep in mind, we're talking about after taxes.

High vs low interest rates watch from 2:51

If you have a high interest rate on your mortgage, it's gonna, I mean, understandably, it's gonna be so much more challenging to come out ahead by investing your money. So for example, if the interest rate on your mortgage is six percent, then any extra money that you send in to pay down your mortgage, it's gonna be like that money is earning you six percent. So that's, I mean, that's considered pretty good. If you'd rather take that extra money and put it into the stock market or invest it, then you better make a rate of return of eight, nine, ten percent, because after taxes you're going to be left with about six percent.

However, on the flip side, if the interest rate on your mortgage is low, like 2.7%, which a lot of people have, then that would be much less challenging, and you would be more inclined to invest your money.

Advanced financial factors watch from 3:46

So what I told you so far, it's pretty straightforward. Now I want to give you three curveballs to just complicate everything, but it's, it's for the purpose of giving you a more precise answer. So the first thing I want to tell you is that if you want to invest your money, then please note that there are a lot of tax-free strategies. For example, you can put your money to work for you in a Roth IRA, a Roth 401(k), an HSA plan, a 529 plan, etc. So there are a lot of tax-free options. Two, if you have a high interest rate, then just know that in the future interest rates, they might drop, and then you can refinance for a lower interest rate.

At that point in time, depending on the new interest rate, you may want to reassess your game plan based on the new variables. And the third thing I want to tell you is that on your personal income tax return, if you are itemizing your tax deductions, then you're going to be receiving a tax deduction for the mortgage interest that you're paying. In that case, you're receiving a benefit for the interest that you pay, so this needs to be taken into consideration when making your calculations.

Strategic tips for debt watch from 4:59

Now let me give you a recap of the key takeaways, and then I'm going to give you some advice. So the recap is that conditions would be more optimal for you to invest your money if, if you have a low interest rate on your mortgage, if you're a savvy investor, and if you have the risk appetite to do so. Conditions would be more optimal for you to use your money to pay down your mortgage if you have a high interest rate on your mortgage, if you're not good at investing, and your risk tolerance is low. If you're leaning towards paying off your mortgage early, I'm going to give you some tips.

The first tip is, a mortgage is a loan. If you have another loan with a higher interest rate, then you're going to want to focus on that loan first. You're going to, you're going to want to use the extra money towards paying off that debt. So for example, if you have a credit card, if you have a credit card with a balance, and that balance is getting charged an interest rate of 20%, then you should prioritize paying off that one first.

Emergency funds and payments watch from 5:59

So here's tip number two. You're thinking about paying off your mortgage early because you have extra cash. You don't want that extra cash just sitting around doing nothing, because inflation is just going to eat away at it. It's going to reduce your purchasing power on that money. However, I understand that, but I would still highly recommend having an emergency fund. So it doesn't have to be a gigantic amount, but I'm just saying that my recommendation is just to have some money set aside, some extra money just set aside for emergencies. So a lot of people with money, so people have money, and those people, they don't have an emergency fund, because they have the mentality that if they have an emergency, then they're just going to liquidate some of their stocks, liquidate some of their cryptos or whatever investments.

However, a lot of times when you're in that situation, you're going to be forced to sell your positions at a really bad time, and it could be when the market crashes, it could be at a time where you don't want to sell your position, and it's going to force you to trigger a realized loss. And tip number three is that most people, they pay their mortgages once a month, but you can switch your payment frequency from monthly to bi-weekly. If you do bi-weekly, then you're going to pay down your mortgage faster, by up to even eight years, so that's going to save you a lot of money on interest.

Of course, if you pay bi-weekly, then in a given year that you're, you're basically squeezing in an extra one month of payments compared to paying monthly. So this small change, it would make you a big difference. And I want to end with two things. The first one is, if you're going to invest your extra money, so if you're going to take the investing routes, I, I'm highly recommending to you that you take advantage of the tax-free options. So as I mentioned, there's the Roth IRA, the Roth 401(k), HSAs, 529 plans, etc. So those are available to you, and I will tell you that those are game changers.

It's because the, the tax-free compounding effects, it's going to be a game changer for you, especially if it's over the course of many, many years. And there's nothing wrong, so there's nothing wrong with having a taxable, just a regular brokerage accounts, but again, I mean, the, the tax benefits, they just cannot be ignored.

Personalizing your decision watch from 8:25

And the last thing that I want to say about this question of should I pay off my mortgage early or invest the money: my answer is that there is no correct answer. It just depends on your situation. Even if you have a low interest rate, let's just say 2.7%, you could probably easily beat that by just putting your money into the stock markets. Even if you don't know anything about stocks, you could just buy an index fund, you could buy a mutual fund. You could probably easily beat 2.7% in the long run. But even in that scenario, if you want to utilize your extra money to pay down your mortgage faster, that's great.

So I know a lot of people, they just want to be debt free, so they just want to get that burden off their shoulders, and then you have people lecturing those people, talking to them about, oh, there's good debt and there's bad debt, you need to leverage the good debts. So some people need that lecture, they need that information. However, a lot of people, they already know that, and they just want peace of mind. That is more important to them, so that is their decision, and I respect that. Other people, they want to invest their extra money, and a lot of people do so successfully, and I'm happy for them too.

Final thoughts watch from 9:43

So all I'm saying is there is no right answer, because it depends on your financial situation, it depends on your financial goals, and those are unique to you and your situation. So there are many factors at play here, and you're just going to have to use your best judgment to decide what is best for you and your situation. But I just want you to know that if you're doing one or the other, or a combination of both, then you're going to be better off than the majority of Americans. So I just want to say that I'm happy for you, and please keep up the good work. I hope that this information has been helpful. Please subscribe if you haven't done so already, and thank you so much for all the support. Please take care.