Pro tip Paying down the mortgage more quickly should not be high on your list of financial priorities. Paying your mortgage off sooner can save you tens of thousands of dollars. You could save thousands of dollars in interest charges from your mortgage lender. With a paid-off mortgage, you also lose out on being able to qualify for the tax credit on mortgage interest payments. You would lose your tax break on your mortgage interest, and would likely make more money investing instead. You will also miss the tax-advantaged savings from your retirement account if you are paying down the mortgage instead.
If you have significant additional cash in the budget, you can decide to make an additional smaller payment toward the principal, as well as put extra money toward your retirement account or another investment. You might be able to secure a lower interest rate and lower monthly payments to free up some additional cash. After looking at the math, you might be better off investing the extra money and simply paying minimum payments on your mortgage.
If your investments are paying you 6% returns, but your mortgage is paying 5%, then you are better off investing the extra cash (with that 1 percent spread). Being debt-free is of course ideal, but if you are expecting a higher investment return than the interest paid on the loan, then investing that extra cash might make more sense instead. Every dollar you pay down reduces the overall amount of interest paid on the mortgage, and making the mortgage payments down the road will decrease a larger percentage of the loan principal. The lack of competition for interest rates and total debt makes it easier to focus on making quick mortgage payments. Paying is also a lot less risky than investing, especially if you have fairly high mortgage rates. easier and quicker sell off a portion of your investments, particularly if they are stocks or funds than to draw down equity from your home via a home equity loan or a home equity line of credit, which can be a longer, more complex process, which comes with new interest rates.
The decision is personal, unless you already have 3 - 6 months in emergency savings, a fully funded retirement account, a desire to lower monthly expenses, and an aversion to market volatility, it makes more financial sense to invest rather than to repay a mortgage. Some homeowners might consider paying down the principal sooner rather than later to save interest, free up cash, or lower the total debt load before they retire or hit other life milestones. An investment- focused strategy can leave you saddled with higher-interest debt if you keep credit card balances high--a burden that can dwarf any gains you make through investing. Puts are particularly likely if you are focused on investments like an Individual Retirement Account (IRA) that emphasizes investing in mutual funds and Exchange-Traded Funds (ETFs) instead of individual stocks, which may be especially risky. Money hacks Investing to reduce tax burden Investing money in a retirement plan, like a 401(k) or traditional IRA, can lower your annual taxable income. Interest paid on a primary-residence mortgage is tax-deductible, saving homeowners thousands each year.