Pay Off My Mortgage Early Or Invest?

This seems to be an ageless question: should you pay off your mortgage early or invest? That’s a very difficult question and there’s no one right answer for all. It’s a question that I’ve struggled with as well. I go back and forth as to what the best answer is. In this post, I finally answer that question for myself. Stick around to see whether I decide if I should pay off my mortgage early or invest?

The Debate

It’s really hard to know who to listen to or what approach to follow. Gurus have very strong opinions on either side of the debate. On the one hand, Ric Edelman, certified financial advisor, lists 11 Great Reasons to Carry a Big Long Mortgage. On the other hand, there’s Dave Ramsey who advocates paying off your mortgage early in his baby step #6. In between are all the other gurus who recommend one position or another. What is a simple investor to do?

Ultimately, and very simplistically, the debate seems to come down to two competing interests: math and emotion. The math suggests that if you have a low-interest rate mortgage, say 3%, you shouldn’t pay off the mortgage early. That’s because you could make more in the stock market, or other investments. That is certainly a fair point, and it’s hard to argue against. After all, simply consider the historical average rate of return in the stock market since inception.

The other side of the debate focuses on the emotions about having a paid off mortgage. The argument being is that if you have a paid off mortgage, and the economy tanks, or you have months of vacancies, you could easily weather the storm. It’s a safety net that let’s you sleep better at night. This also is a fair point and hard to argue against.

The bottom line is that there is merit to both approaches, and as previously mentioned, there is no one size that fits all.

My Considerations

There are numerous websites that lists pros and cons as to whether you should pay off the mortgage early. Rather than doing the same, I thought I’d list some of the things I greatly considered regarding this difficult decision.

As far as whether I should pay off my mortgage early, I have a different approach. I initially was sold on the idea that I would come out mathematically ahead by investing the extra cash. A paid off house means that my money is tied to equity that is not being actively used. Perhaps more importantly, there was no guarantee that I was going to own the same house for 30 years. After all, if I decide to sell the house, then what was the point of paying off the mortgage early?

I listened to the ‘Ric Edelmans‘ of the world who suggested that I should not pay off my mortgage early. This was even more convincing since I had a rental property and not my primary mortgage. So, why should I pay off my mortgage early when I have tenants who would do the job for me? That thought was very convincing to me and that has been the approach I’ve followed for the past two years. So, did anything change?

The answer is a resounding yes!

The Realization

What changed is that two years have gone by and I still have not paid anything extra on the mortgage. I still have 28 more years to go before I will have a fully paid for house. Now that two years have gone by, I have the benefit of hindsight. In looking back, I realize that I am more bothered by the fact that I have 28 more years until I have a paid-for house than excited about the money I’ve made or otherwise will make in the stock market!

Now, I realize that two years is not a long time for money to compound and for the investments that I’ve done to reach their full potential. That’s not the point. The point is that I regret not having paid extra on my mortgage. That statement is so profound that it bears repeating. I regret not having paid extra on my mortgage! This is huge! This tells me that I fall more on the emotion side of the debate than I do the financial or mathematical side.

The Decision

Having come to that realization, I’ve decided that the best approach for me is to take a balanced approach. That is, I will both invest AND pay off my mortgage early. It might be a cop-out, but in my opinion, the answer to this difficult question doesn’t have to be an all or nothing approach. It can be blended. In accordance with my 2019 Financial Plan, I’ve decided to devote a minimum of $500 extra per month to my rental property mortgage. According to my lender, this will allow me to pay off the mortgage in 15 years. I will still be contributing the max to my Roth 401K and Roth IRA. In addition, I will make additional contributions to my dividend portfolio.

The 15-year mark is especially important because that’s around the time I expect to retire. So, consistent with my earlier goals of investing in real estate, I would like to own several paid-off properties by the time I retire. This has always been my goal, but for some reason, that goal (which has never been written down), never materialized into action.

I am still considering whether to do a bi-weekly mortgage. I’ll make that decision in March. But, if I do, the bi-weekly mortgage coupled with the extra $500 payment is very enticing in terms of how early I can pay off the mortgage. I’ll have to double-check with the lender whether the 15-year time horizon they quoted me (for the $500 extra payment) was with or without the biweekly mortgage.

Even as I write this post, I’m still not certain that the best decision for me is to pay off my mortgage early.  Arguably, that $500 over the course of the next 28 years would outweigh any benefit I receive from paying off my mortgage early, financially speaking. But, while it may not be the best approach, in my opinion, it is the right approach for me. In fact, I am reminded of the famous aphorism that suggests that you shouldn’t let the perfect be the enemy of the good.

Conclusion – What Now?

The decision to pay off the mortgage early or invest is a difficult one. There are pros and cons on each side and there’s no single best option that will work for everyone. After given it some thought, I’ve decided for the above reasons that I will both pay off my mortgage early AND invest. That’s the right thing to do for me.

By the way, you may recall from my 2019 Goals that I plan on buying another house. If I pay off my rental mortgage early, I plan on using the proceeds to either a) save for a down payment on another house or, more likely, b) pay off early the next house I buy! Only time will tell how fast that can happen.

I’m really looking forward to your thoughts on this post. What would you do? Do you think it’s better to pay off your mortgage early or invest? Did you think I made the right decision? Let me know by commenting below.