You refinanced at 3% a few years ago, and now you're torn. Should you throw an extra $500 per month at the mortgage and pay it off early? Or invest that money and let the mortgage run its course? The answer depends on math, psychology, and your specific situation. Let's break down both sides.
The pure math favors investing when your mortgage rate is low. If you're paying 3% on your mortgage but can earn 7-8% investing in index funds, you come out ahead. On a $300,000 mortgage, paying an extra $500/month saves you about $50,000 in interest over the life of the loan. But investing that same $500/month at 7% for 30 years? You end up with roughly $600,000. The difference is massive.
But math isn't everything. There's the psychological factor - the peace of mind from owning your home free and clear. No monthly payment. True ownership. For some people, that emotional benefit outweighs the financial opportunity cost. If market volatility keeps you up at night or a paid-off house lets you sleep better, those feelings have value that spreadsheets can't capture.
| Factor | Pay Off Mortgage | Invest Instead |
|---|---|---|
| Best if mortgage rate is... | 5%+ | Below 4% |
| Risk tolerance | Low (guaranteed return) | High (market volatility ok) |
| Time horizon | Near retirement | 10+ years to retirement |
| Emergency fund | Already solid (6+ months) | Building while investing |
| Emotional benefit | Huge peace of mind | Comfortable with debt |
The hybrid approach makes sense for many: split the difference. Put half toward the mortgage, half into investments. You make progress on the house while building wealth elsewhere. It's not optimal either way, but it balances the math advantage of investing with the psychological benefit of mortgage reduction. Plus, if the market crashes, you'll appreciate having reduced your mortgage balance.
One thing's certain: doing nothing with that extra $500 is the worst option. Whether mortgage payoff or investing wins depends on your specific numbers, but both beat letting lifestyle inflation absorb the money. Run the math for your situation, factor in your comfort level, and pick the strategy that lets you sleep at night while building wealth.