Is It Better to Pay Off Your Mortgage or Invest Extra Cash?

Should You Pay Off Your Mortgage Early?

This is one of the most common questions in financial planning:

“Is It Better to Pay Off Your Mortgage or Invest Extra Cash?”

On the surface, this looks like a math problem. But in real life, it’s also about stress, flexibility, and peace of mind.

The best answer usually lives somewhere between the numbers and how you want to feel about your money.

The Black-and-White Math: Invest the Lump Sum

Assume the following situation:

• Mortgage balance: $200,000

• Interest rate: 5%

• Time left on mortgage: 15 years

• Lump sum available: $200,000

If you use the lump sum to pay off the mortgage, the decision is final. But what if you invest that $200,000 instead?

If you invest $200,000 at an average 7% annual return for 15 years:

• The investment could grow to $551,806.31

• Over the same 15 years, you continue making regular mortgage payments

• At the end of the term, the mortgage is fully paid off

Investing the lump sum may financially benefit you

The result:

• You own your home outright

• Plus, you have a sizable investment account

From a pure math standpoint, investing the lump sum often produces a higher net worth over time when returns exceed the mortgage rate.

The Gray Zone: Peace of Mind Has Value

This is where financial planning stops being just about numbers.

A paid-off mortgage delivers something that investing can’t guarantee: certainty.

When the mortgage is gone:

• Monthly expenses drop

• Cash flow improves immediately

• Job loss or income disruption becomes less stressful

• Retirement planning feels simpler and more secure

For many people, especially those nearing retirement or with variable income, this peace of mind is incredibly valuable.

Even if investing “wins” mathematically, carrying a mortgage may feel uncomfortable or stressful.

That emotional side of the decision matters.

A Middle-Ground Approach: Flexibility

This decision doesn’t have to be all or nothing.

Instead of choosing between paying off the mortgage or investing the entire lump sum, many people land in the middle, combining growth with progress toward being debt-free.

Here’s how that can work.

• Mortgage balance: $200,000

• Interest rate: 5%

• Time remaining: 15 years

You decide to:

• Invest all or part of the $200,000 lump sum

• Continue making your regular mortgage payment

• Add an extra $500 per month toward the mortgage

By doing this:

• The mortgage would be paid off in approximately 10 years and 3 months

• You would save about $28,676 in interest

• You keep a large portion of your money invested and working for you

Investing the lump sum and paying extra monthly payments can be a helpful middle ground

This approach creates a powerful balance:

• You reduce debt faster and gain peace of mind

• You keep liquidity and flexibility through investments

• You don’t lock yourself into a single, irreversible decision

If circumstances change, income, job stability, or goals, you still have options. You can always slow down payments, accelerate them further, or tap investment assets if needed.

How Do Taxes Factor into the Decision?

Before making a significant mortgage decision, taxes deserve attention.

With the SALT deduction increasing to $40,000, mortgage interest and property taxes may once again help some households itemize deductions.

That means:

• Keeping a mortgage could provide real tax benefits

• Paying it off too quickly may reduce those deductions

In many cases, it makes sense to wait until you see how your tax picture looks before committing to a full payoff.

Final Thoughts: There Is No One-Size-Fits-All Answer

Deciding whether to pay off a mortgage or invest a lump sum isn’t just about the math, it’s about how the decision fits into your life.

On paper, investing often looks better when long-term returns exceed your mortgage rate. Compounding can work in your favor, and keeping money invested provides flexibility and liquidity. For many people, that approach makes sense.

At the same time, paying off a mortgage delivers certainty. Lower monthly expenses, reduced risk, and peace of mind are real benefits, especially as income changes or retirement gets closer.

That’s why there’s no universal correct answer. Some people invest. Some pay off debt. Others blend the two. The best choice is the one that balances numbers with how you want to feel about your finances.

As an advisor, my role is to help you understand the trade-offs and guide you toward a decision that supports both your financial plan and your peace of mind.

- Steve Balch, CFP®

Financial Advisor in Bergen County, NJ

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