Should I Pay Off My Mortgage Early or Invest?

The age-old financial dilemma: use extra cash to pay down your mortgage or invest it in the stock market? Fox Hill Wealth Management's experts break down the math, psychology, and strategy behind this crucial decision.

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One question dominates financial discussions more than almost any other: Should I pay off my mortgage early or invest that extra money instead? It's a debate that has sparked countless social media arguments and divided financial experts for decades.

In a recent episode of the Wealth Wisdom podcast, Fox Hill Wealth Management's principals Bill Ryan and Eric Benz tackled this question head-on, offering insights that might surprise you. Their conclusion? The math strongly favors investing over early mortgage payoff—but the decision isn't just about numbers.

The Case Against Early Mortgage Payoff

Why Dave Ramsey's Advice Falls Short

Popular financial personality Dave Ramsey advocates for aggressive debt elimination, including paying off mortgages early. But as Eric Benz points out in the podcast, this blanket advice ignores crucial nuances that could cost you significant wealth over time.

"Every billionaire takes out debt," Benz notes. "Investors take out loans against their own assets to buy more assets. That's how you make money. Home debt is good debt—that's the best debt you can have."

The fundamental flaw in the "pay it off early" approach becomes clear when you examine the numbers:

• Historical stock market returns: 10% annually over the long term (15% over the past 15 years)

• Current mortgage rates: Approximately 6.5-8%

• The spread: 2-4% in favor of investing

  
  

The Liquidity Advantage

One of the strongest arguments against early mortgage payoff is liquidity. When you put extra money toward your mortgage, that cash becomes locked in your home's equity.

Accessing it later requires:

• Selling your home

• Taking out a home equity line of credit (HELOC) at variable rates

• Refinancing (which may not be available at favorable terms)

  
  

As Bill explains: "You're better off having that money on hand than putting it into essentially giving it to the bank. The value of your house is gonna go up or down no matter what... whether you have 80% financed or 5% financed."

When Investing Makes More Sense

The Compounding Effect

The real power of investing over mortgage payoff becomes apparent over time through compounding returns. Consider this scenario from the podcast:

• Monthly extra payment: $2,000

• Mortgage rate: 6.5%

• Investment return: 10%

• Time horizon: 15 years

By investing the difference (3.5% spread), that money compounds over time. As Ryan notes: "Next thing you know, you're 40-50% wealthier... and you have that cash and you can then just pay off your mortgage at that point if you want to."

Tax Considerations

While the mortgage interest deduction has been reduced under current tax law, homeowners can still benefit from:

• Deducting mortgage interest on loans up to $750,000

• Capital gains exclusion of up to $500,000 for married couples ($250,000 for singles) on primary residence sales

• Tax-deferred growth in retirement accounts funded with money that would otherwise go to mortgage payoff

The Smart Money Strategy

Emergency Fund First

Before considering either option, ensure you have 3-9 months of expenses in an emergency fund. This provides the liquidity needed for unexpected home repairs, job loss, or other financial emergencies without forcing you to sell investments at an inopportune time.

Asset Allocation Matters

The decision becomes more nuanced based on your investment approach:

• Aggressive investors (high stock allocation): Almost always better off investing the extra payment

• Conservative investors (heavy bond allocation): May consider mortgage payoff if returns are only marginally higher than mortgage rates

Consider Your Mortgage Rate

The decision equation changes based on your specific mortgage rate:

• Low rates (2-4%): Almost never pay off early—invest instead

• Moderate rates (5-7%): Generally favor investing, but consider your risk tolerance

• High rates (8%+): May warrant consideration of early payoff, but still likely better to invest

The Psychological Factor

While the math typically favors investing, there's value in considering the psychological aspects:

Benefits of early payoff:

• Peace of mind from being debt-free

• Guaranteed return equal to your mortgage rate

• Reduced monthly expenses in retirement

Benefits of investing:

• Higher potential returns

• Greater financial flexibility

• Building wealth for other goals

Real-World Application

Let's examine a practical example:

Scenario: $300,000 remaining mortgage at 6.5%, extra $1,500 monthly available

Option 1: Pay off mortgage early

• Guaranteed 6.5% return

• Mortgage paid off in ~10 years

• Total interest saved: ~$180,000

Option 2: Invest the extra payment

• Potential 10% annual return

• After 10 years: ~$305,000 in investments

• After 15 years: ~$621,000 in investments

• Mortgage balance: ~$180,000 remaining

In this scenario, investing leaves you with over $440,000 more wealth after 15 years.

When Early Payoff Might Make Sense

There are limited scenarios where early mortgage payoff could be appropriate:

1. Nearing retirement and wanting predictable cash flow

2. Extremely risk-averse investors who can't stomach market volatility

3. Very high mortgage rates (9%+) that are difficult to beat consistently

4. Unstable income where reducing fixed expenses provides security

   
   

The Bottom Line

The mathematical case for investing over early mortgage payoff is compelling. Historical market returns significantly outpace mortgage rates, and the liquidity benefits of keeping money invested rather than locked in home equity provide additional advantages.

However, this strategy requires discipline and a long-term perspective. As the Fox Hill team emphasizes: "You gotta stay invested. You can't take it and put it in a savings account. It's gotta be invested in the market."

Listen to the Full Discussion

This blog post covers the key highlights from Fox Hill Wealth Management's in-depth discussion on mortgage payoff versus investing. For the complete analysis, including specific scenarios and additional insights from financial experts Bill Ryan and Eric Benz, listen to the full Wealth Wisdom podcast episode on Spotify, Apple Podcasts, or YouTube

The team also offers Excel calculators to help you run the numbers for your specific situation. Whether you're wrestling with this decision or want to see how it impacts your personal financial plan, Fox Hill's advisors are available for complimentary consultations.

Ready to optimize your financial strategy? Contact Fox Hill Wealth Management at hello@foxhillwealth.com or visit foxhillwealth.com to schedule your consultation and access their decision-making tools.

This analysis is for educational purposes only and should not be considered personalized financial advice. Individual circumstances vary, and it's important to consult with a qualified financial advisor about your specific situation.