Learn How To Start Investing In Real Estate
Learn How To Start Investing In Real Estate

Pay Off Mortgage Or Invest: Pros & Cons

Written by Than Merrill

As a financially savvy homeowner, you may find yourself with a little extra cash each month. Deciding what to do with the money you save is entirely up to you, but most homeowners find themselves in a unique predicament: pay off the mortgage or invest.

There is not a one-size-fits-all approach for investing in real estate, and deciding whether or not to speed up your mortgage payments is entirely up to you. However, it is a great idea to consider the benefits of both options. You never know which decision will be the right one for you until you do a little research. Keep reading for more information on the benefits of choosing to invest or pay off a mortgage.

[ Thinking about investing in real estate? Register to attend a FREE online real estate class and learn how to get started investing in real estate. ]

Pay Off Mortgage Or Invest In Real Estate

Paying off a mortgage is a difficult feat for many homeowners, which is why they often jump at the chance to do so. However, in redirecting the money it takes to pay down a 30-year mortgage, many homeowners could find themselves with a unique opportunity: investing in real estate. Now, there is no right or wrong answer to the question “should I pay off my mortgage or invest,” but there are unique benefits to each option that homeowners should carefully weigh before deciding one way or the other.

To begin, let’s address the obvious reason for paying off a mortgage: peace of mind. According to Andrew Latham, the managing editor of, peace of mind can’t be underestimated. “For example, people who get a great deal of peace of mind from knowing their mortgage is paid off may decide it is the right choice for them, even though it doesn’t maximize the returns of their savings. It may also be a good choice for people who want to simplify their finances before making a career change or starting a business,” says Latham.

Many homeowners find satisfaction in owning a home free of mortgage payments, and rightfully so. The ability to pay off a mortgage is something to be proud of. By paying off a mortgage by making extra payments, homeowners may find themselves debt-free and with increased equity in their homes. These benefits can easily snowball into other perks, such as a decreased cost of living (with fewer payments each month) and saving on interest payments. It can also allow you to save for retirements more effectively. You may even find you accomplish some of these on the way to paying off your mortgage; for example, after you have made a certain amount of payments, you may find you are no longer responsible for private mortgage insurance.

If there are so many benefits to paying off a 30-year mortgage, why doesn’t everyone do it? While there are numerous perks to paying off a mortgage, there are also perks to investing in real estate. It’s important to look at your financial health as a whole rather than focusing exclusively on your mortgage payments. Real estate investors may find success paying off a mortgage to a certain point and delegating funds to other investments (while still making mortgage payments, of course). This can open homeowners up to a multitude of opportunities through diversified investments.

According to Craig Hawthorne, an investor and economics enthusiast at Modest Money, most homeowners are better off funneling money into wise investments. “The value of compounding is simply too much to ignore,” says Hawthorne, who points out that adding $250 a month to an investment account from age 25, with a modest 8% annual return would mean a portfolio worth $878k by age 65, whereas investing $250 a month from age 35 would result in just $375k by age 65.”

By investing in real estate, homeowners may be surprised to find higher overall returns and tax benefits. For example, in many cases, the return on an investment property is higher than the cost of their mortgage over time. Because of this, many investors will find long-term security and potentially a steady stream of income. You may also notice your properties appreciating over time, which can further add to your long-term financial security. I must add that choosing to invest rather than pay off a mortgage does not come without risk. All things considered, however, there are several benefits on either side of the coin, and homeowners should be ready to consider which plan is right for them.

Factors To Consider Before Paying Off Your Mortgage Early

According to data from FiveThirtyEight, only 32 percent of Americans have 100 percent equity in their homes, meaning their mortgage is either entirely paid off or they never had one. Most homeowners aspire to join the ranks of this 32 percent; although, paying off your mortgage should not be your only financial goal as a homeowner. There are many ways to take care of your financial health while still paying for your mortgage. If you have extra cash each month and find yourself wondering, “should I make extra payments” or “should I pay off my mortgage,” these are some factors you should consider:

  • Your Savings: If paying off your mortgage early means depleting your life savings, think carefully about the decision before getting ahead of yourself. Remember that unexpected costs do come up, and make note of how much cash you can actually spare before making a decision.

  • Taxes: Take a look at your tax strategy and whether or not you rely on tax deductions in the form of mortgage interest each year. Make note of whether or not paying off your mortgage will impact your deductions and in which ways.

  • Financial Goals: Ask yourself what your financial goals are, both right now and for retirement. Does paying off your mortgage allow you to save for retirement? Consider whether you have other important goals on the horizon, such as paying off student loan debt or credit cards.

  • Timeline: Are you planning on staying in your home for the long haul? If you foresee yourself staying in your home, paying off your mortgage when you can make more sense. This factor may not weigh as heavily as the others, but you should consider how long you plan on living in your home.

  • Stage In Life: Depending on where you are at with your career, certain financial decisions may be more or less risky. For example, if you are nearing retirement and are hoping to pay off your mortgage before then, using extra cash to do so can make the most sense.

Factors To Consider Before Investing In Real Estate

As you consider whether or not to use your extra cash to invest in real estate, you may find that several of the factors necessary are the same. When it comes to your financial standing, there are several things you should always keep in mind. It will benefit you to be thorough with your considerations. Here are just some of the factors you should take into account:

  • Type Of Investment: There are a number of opportunities available if you decide to invest in real estate, and it is important to look at each one in order to decide which one best aligns with your situation. You may find success in a single-family rental property or commercial real estate. Examine your options before coming to any conclusions.

  • Risk Tolerance: This is something to think about when considering any type of investment, even outside of the realm of real estate. Understand how much risk you are willing and able to take on and recognize the implications.

  • Potential Returns: When it comes to real estate investing, you may have to wait a little before seeing your returns. Gauge whether or not your timeline for investing will align with the potential return on investment for whichever avenue you choose.

  • Investment Portfolio: Take stock of your current financial standing. Similar to assessing your financial goals, you should look at whether or not it makes sense for you to diversify your investments and expand your financial portfolio.

  • Define Success: Examine what financial success means to you and how a potential investment fits in with that vision. If the path you’re currently on does not appear to be getting you any closer to your financial goals, perhaps it’s time to consider investing.

[ Thinking about investing in real estate? Register to attend a FREE online real estate class and learn how to get started investing in real estate. ]

pay off mortgage or buy rental property

Refinance and Invest In Real Estate

If you cannot decide between the two, some investors may choose to both refinance and invest in real estate at the same time. The current low mortgage interest rates make now a smart time for some investors to refinance their current mortgage and reduce the monthly cost of their mortgage by securing a lower rate. By doing so, investors can then invest the money they are saving on their monthly mortgage payment. This strategy allows investors to both save money on their current monthly payments while also taking advantage of other investment opportunities available to them.

Pay Off The Mortgage And Invest Simultaneously

If you can’t decide which path is right for you, or they both sound too good to pass up, you may want to try paying off your mortgage while also investing. You can build equity in your home this way, while also growing your investment portfolio for the future. The compromise here is that you will be splitting the allocation of funds between the two sources, so you won’t pay off your mortgage as quickly or reach your investment goals as fast, but you will still be making progress on both fronts. If you’re on the fence and can’t decide which way to go, this is a great way to start off and see if paying off your home or investing your money feels better for you and your situation. You can reassess your money allocation down the line and change your strategy if you decide that paying off your mortgage or investing your money is a better fit for you.

How to Minimize The Risk of Investing

You will want to minimize any risk associated with not paying off your rental property mortgage and using your money to invest in another property instead. Investment property owners have several options open to them that can lower financial risk or be prepared in the event of job loss or a similar emergency. Here are a few ways to minimize the risk of investing:

  • Make A Backup Plan: Among real estate investors, there are several different opinions on how much money you should have saved in case of an emergency. A common estimate financial advisors recommend is to have 3 – 8 months’ worth of expenses set aside. This will give you enough time to assess your situation in the case of job loss and decide your next move. Your reserves should be enough to cover both personal and rental property expenses.

  • Cover Yourself With Insurance: Different forms of insurance will help you and your loved ones in case of an emergency. Income protection will help if you are unable to work. Medical and life insurance is also essential for protecting yourself and your family. It is highly advisable to be covered by many forms of insurance to be prepared for any major life events.

  • Prioritize Paying Off Your Mortgage: Once you start seeing returns on your investment, you may use it to pay off your personal mortgage until you decide to invest at a later time. It is important to note that any part of your income that is not being used to pay down your mortgage is charged with interest. In this case, paying off your mortgage should be at the top of your priority list.


Realizing you have extra cash each month is a great feeling, and deciding what to do with it should not take away from that. Whether or not you decide to pay off a mortgage or invest in rental property is entirely up to you, and there are numerous benefits to both. There is no mortgage or investment calculator to tell you exactly what to do; instead, I recommend anyone deciding between the two to do their research. You may be surprised which option is better for you. Whatever you decide to do, you should be proud that you can make this decision at all.

Ready to start taking advantage of the current opportunities in the real estate market?

Click the banner below to take a 90-minute online training class and get started learning how to invest in today’s real estate market!

The information presented is not intended to be used as the sole basis of any investment decisions, nor should it be construed as advice designed to meet the investment needs of any particular investor. Nothing provided shall constitute financial, tax, legal, or accounting advice or individually tailored investment advice. This information is for educational purposes only.