Hull Financial Planning Personal Finance FAQ Series: Should I Pay Additional on My Mortgage or Invest the Money?

When you have extra money at the end of the month, the biggest question is what to do with that money. If you have a mortgage, you could put extra down on the mortgage, or you could invest the money in the market with the hopes of earning more than your mortgage rate. What should you do?

Take a look at the video below and find out what to do.

Should I Pay Additional on My Mortgage or Invest the Money?

The transcript follows.

This is a question which confounds many people who have excess money at the end of the month.

What you’re comparing is a sure thing – reducing your mortgage – to a not-so-sure thing – investment returns which should beat your mortgage rate but may not.

First, let me dispel a misunderstanding. A lot of people say that you should include the tax break from a mortgage, but that’s not exactly the case. If you can’t get deductions, including mortgage interest, in excess of the standard deduction, then you don’t get a mortgage interest deduction. You only get to benefit from the mortgage interest deduction to the extent that your other deductions exceed the standard tax deduction. So, in most cases, your return on investment really is your mortgage interest rate, not reduced by your tax deduction.

I can tell you what we did. I have a personal predisposition against risk. I’d feel worse about investing the difference and losing money than I would if we made money. Plus, I don’t believe that I can personally outperform the market consistently over a long period of time. So, we put all of our excess cash into paying off the mortgage.

Sure, it’s possible that, in time, interest rates could rise to the point where deposit rates would have been higher than my mortgage, and we could have created an arbitrage opportunity and made a little bit of money. However, the amount we would have made would have been pretty small, and the risk wasn’t worth it.

I can tell you that it’s a lot nicer having no mortgage. That’s a guaranteed, and unquantifiable return that you will get if you pay off the mortgage early. So, while some may argue that it’s mathematically incorrect to pay off the mortgage, I argue that the mathematics don’t quantify risk and they don’t value utility properly. You might, and I emphasize might, be able to get a better return investing the money, but you can never go wrong paying off the mortgage early.

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Jason Hull was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively. He has a BS from the United States Military Academy at West Point and a MBA from the University of Virginia Darden Graduate School of Business. He held a CFP certification from 2015 - 2021. You can read more about him in the About Page. If you live in Johnson County, Texas or the surrounding areas, he and his wife are cash buyers of Johnson County, Texas houses.

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