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Paying off mortgage vs. investing the money: Which is Better?

In general, investing in the stock market provides a higher rate of return, especially in the long-term. However, investing comes with the risk of losing money.

Whether you choose to pay off your mortgage or invest, both options take careful financial planning.
 
There is no inherent risk in paying off a mortgage. However, some lenders may charge a prepayment penalty on mortgages paid before the end of the specified loan term. Paying off your mortgage may require a large lump sum of money. If you have debt and don’t have an emergency savings account and retirement funds already saved, then paying off your mortgage could leave you with little or no money for emergencies or for investment
 
At Credit Union of Southern California (CU SoCal), we make getting a mortgage easy!
 
Call 866.287.6225 today to schedule a no-obligation consultation and learn about our mortgages, home equity lines of credit, auto loans, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all your banking needs.
 
Read on to learn more about whether it is better to pay off a mortgage or invest the money.

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Pros and cons of paying off your mortgage

As with all financial endeavors, there are pros and cons to consider when deciding whether to pay off your mortgage or invest:

Pros:

1. You'll own your home. The quickest path to full homeownership is to pay off your mortgage. You’ll have the benefit of equity, so if you do need to borrow money in the future getting a home equity loan is an easy option.
2. You'll save on interest. Each monthly mortgage payment includes interest on the loan, which can add up to thousands of dollars a year that you could be saving.
3. You won't have to make mortgage payments. Eliminating mortgage payments frees up money that can be used for other expenses, such as home renovations, paying down high-interest debt, or building up your retirement account.

Cons:

1. Harder to save for retirement, emergencies, etc. Paying off your mortgage may require a large lump sum of money. If you haven’t planned for your future by establishing a retirement account, keeping your debt low, or having reserve funds for emergencies, then making a lump-sum mortgage payoff is not a good idea.
2. No more tax deductions. According to the IRS, if you paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage, you will generally receive a Form 1098 or a similar statement from the mortgage holder. In most cases this mortgage interest should be reported and is tax deductible. Once a mortgage is paid off there is no longer any mortgage interest to deduct. Before deciding to pay off your mortgage we recommend speaking to a tax professional to see how eliminating this deduction would affect your financial situation.
3. Mortgage prepayment penalties. Some lenders and loan servicing company may charge a pre-payment penalty (i.e., fee) if the mortgage is paid off before the end of the specific loan term. According to the IRS, if you pay off your home mortgage early, you may have to pay a penalty. You can deduct that penalty as home mortgage interest provided the penalty isn't for a specific service performed or cost incurred in connection with your mortgage loan.
4. No funds to invest. Using your available funds to pay off your mortgage could leave you with little or no money, at least temporarily, to put toward investing for retirement.

Pros and cons of investing your money

Pros:

1. Many types of investments are available. Depending on your level of risk tolerance you may choose from a wide range of options from stocks (which are high risk) to bonds and bond funds (which tend to be low risk). Even with financial market fluctuation, investing yields a higher rate of return vs. the interest savings from paying off a mortgage.
2. You'll have more financial flexibility. If you find that you need cash, it’s relatively easy to cash in investments (except for retirement accounts) or sell stocks.
3. Potential for employer match on retirement accounts. Retirement savings can grow quickly, especially if your employer offers contribution matching (some employers match the percentage you put in, up to a specific amount). You may also look into target year retirement funds that provide an investment strategy for people who know when they’ll be retiring.

Cons:

1. Investing is riskier. Financial markets fluctuate daily and interest rates change. The higher the risk you are willing to accept the more you stand to make on investments; however, you could also lose the money you invest or come away with less than you started with.
2. Investing sill costs money. Investment brokers and brokerage companies typically charge fees for their services. Free investment accounts are available, but they come with no guidance, so you’ll need to do the research on your own.
3. Investing may not resolve unpaid debt. It costs money to have debt, as you pay interest on the outstanding balance. Paying off debt is always a good way to save money. Before you sink money into investments, be sure your debts are paid.

Deciding between paying off your mortgage and investing

While paying off your mortgage may sound like a good idea, it’s important to consider your overall financial situation before you do. To safely pay off your mortgage, consider that your lender/loan servicer may charge an early payment penalty fee. You should also make sure you have enough money in the bank for emergencies, have no outstanding high interest debt (e.g., credit cards), and that you’ve also stocked money for retirement. With mortgage rates fairly low, paying off your mortgage should be a last step after other financial needs are met.

How to get the best of both worlds

Invest or pay off your mortgage? Another strategy is a blended approach that includes paying down your mortgage by paying a little more toward the principal each month, as well as establishing or adding to investments. If you have a steady income, no or low debt, and have ample emergency funds already saved, you’re in the perfect position to put your money to work for you in both ways.
 
However, deciding whether to pay off your mortgage or invest your money is a personal financial decision that is unique for each homeowner. While we’ve talked about the financial considerations, there are also factors like how long you plan to live in the home, your age, employment status, and retirement plans. All of these should be taken into consideration before you pay off a large mortgage. You may also consider speaking with a financial advisor and tax professional before you make a decision.

Why savvy consumers choose CU SoCal

For over 60 years CU SoCal has been providing financial services, including mortgages, Home Equity Loans, HELOCs, car loans, personal loans, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
 
Please give us a call today at 866.287.6225 today to schedule a no-obligation loan consultation with a CU SoCal Member Services specialist.

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