Do you have extra money and are wondering what to do with it? Use our early mortgage payoff calculator to help you determine if you should use extra money to pay off debt or invest.
Results are not a complete assessment of all factors required to make a final decision. Contact one of our investment advisors for more complete information based on your personal circumstances
Invest or pay down mortgage early?
Which should be a greater priority: paying down the mortgage on your house or investing for retirement or other long-term financial goals? There’s no one-size-fits-all answer.
Which way would you lean? It may be as simple as knowing if you make decisions with your head or your heart. You may get emotional and psychological satisfaction from paying off your mortgage, but paying extra on your mortgage may leave you with less money in the future and less time to replenish your nest egg or accomplish any goals you have for retirement.
From a purely dollars and cents view, the decision is more black and white: will you end up with more money in your pocket by staying invested or paying off your mortgage? Here are a few things to keep in mind:
Mortgage interest rate
The interest rate on your loan has a huge bearing on your monthly payment. The higher the rate, the more interest you pay. Since mortgage interest is typically tax-deductible and reduces your taxable income on your annual tax return, it reduces your effective mortgage rate. For example, if you’re paying a five percent interest rate on your mortgage, depending on your tax bracket, your net mortgage rate could be as low as 3.25 percent.
Of course, as you get closer to your mortgage payoff date, you’ll be paying more toward principal and less toward interest every month. So your interest deduction could be quite a bit lower if you’re nearing the finish line of your mortgage.
If you’re in a higher bracket, the benefit will be more pronounced; in a lower bracket, not as much. Also, if you’re not able to fully use the interest you pay each year as a deduction on your return—for example, if you don’t itemize your deductions—your net rate wouldn’t be affected as much.
Rate of investment return
What rate of return do you need to earn to make it worthwhile to keep your money invested? Say you owe $50,000 on your mortgage and are considering paying it off. If you earn an average return of five percent on your investments, your average annual gain would be $2,500. By subtracting your annual mortgage interest cost from the earnings figure, you’ll find your net gain. That will help estimate how much extra you might accumulate by keeping your money invested rather than paying off your mortgage.
Extra principal payments net a guaranteed return—a reduction in your loan amount and progress toward owning your home outright. Stock market investors have historically increased their wealth over time, but aren’t guaranteed anything.
Bottom line: no one decision is right for everyone. Your dream is likely different from your neighbor’s. Get some help from your tax advisor and make a decision that’s right for you.