Should I Pay Down My House Mortgage or Invest My Cash?

By Financial Advisor Carrie McDonnell

Now that tax season is through, maybe you find yourself in the pleasant position of having some extra cash. For some, that cash surplus may elicit questions like, “When should we go to Disney World, kids?!” For others, the question might be, “Should I pay down my mortgage or invest?” To each their own, but if you are in the second category, here are a few considerations.

Pros To Investing v. Paying Off Your Mortgage Early

From a financial perspective, it is typically best to invest your money than paying off your mortgage at a faster rate. For example, if you were to invest in an index fund that tracks the S&P 500, the S&P 500 has returned an average of 10+% annually over the last century. Past performance doesn’t guarantee future results, but if history is a guide, a conservative estimate on future returns of the S&P 500 would be 8%.¹

Considering that more than 82% of homeowners have mortgages with interest rates less than 5%, the vast majority of homeowners are likely to see better long term financial results from investing in a low fee S&P 500 index fund with a historic return of 8+% than reducing the duration of their mortgage with a less than 5% interest rate.²

Another pro to market investing: if you choose to invest your cash in tax-advantaged retirement accounts like IRAs or 401ks, you will be able to take advantage of the tax savings associated with those types of accounts. In addition, if your employer offers a match, that’s free money that can compound over time.

Cons to Investing v. Paying Off Your Mortgage Early

The biggest drawback to investing: the stock market is more volatile than the housing market. You should be sure your investing timeline is long enough to weather ups and downs. You also need to make sure that your investment strategy matches your risk tolerance, and you’re mentally prepared for short term losses along the way.³

Another consideration: if you are a new homeowner who mortgaged a home in 2022 or 2023, you may be saddled with interest rates closer to 7%. Homeowners with interest rates this high may not reap enough benefit from market investing and might better put that extra cash to work by reducing their mortgage payments or duration. Refinancing when interest rates fall may also be an important strategy to leverage.

Lastly, some people are debt averse. Until your mortgage is repaid, the bank technically owns your home, and that may not sit well with you. For some, regardless of the math, paying off the mortgage can provide peace of mind.

1. 10% return rate does include dividends being reinvested. This figure illustrates the return on one stock index fund, however, a diversified portfolio would include exposure to more indexes than just the S&P 500.
2. https://www.washingtonpost.com/business/2023/12/14/mortgage-rates-7-percent/. Note: Due to the diverse nature of mortgages, it is recommended that you consult with your tax advisor regarding the impacts of paying down mortgage interest vs investing in a brokerage.
3. https://www.forbes.com/advisor/Pay Off Your Mortgage Early Vs. Investing: Which Is Best? – Forbes Advisormortgages/pay-off-mortgage-early-vs-investing/