Pay Down the Mortgage or Invest, that is the question

I had a long conversation with Bert today on the phone as he was on his way to Detroit.  It was regarding what the heck to do with my idle cash that I typically use for investment purposes, but am getting anxious as it has been almost two weeks since purchasing a stock.  We were trying to discuss if and why I should make extra payments towards my mortgage, which I typically do once per year.  Here is how our discussion went.

pay down the mortgage or investVSpay down the mortgage or invest

The Situation

As I have discussed regarding my fixed expenses way back when, I have a mortgage, currently at $84,007.14:

Screen Shot 2014-09-20 at 7.33.28 PMNow, the trouble here is the interest rate is only 4.375%, as you can see above and I’m about 3 years into my mortgage.  I have made an extra payment every year since I’ve owned it, as that typically reduces your actual maturity date by 6-7 years if you perform this.  At 4.375% – it’s harder even today to get a 30 year mortgage with that sort of rate; also – after-tax it is roughly around 3.67-3.75% when taking deductions into the equation.  Now, I don’t plan on selling this house, as it is in a prime real estate location that is surrounded by 2-3 colleges/universities, is a family-oriented neighborhood, has development projects coming up all of the time and has a semi-easy access to Cleveland’s public transportation system, as well as 2 beautiful mall/outlet areas.  Therefore, I would rent it out before anything, as I had in the past by having a roommate (which turned sour), and simply purchase another property or some other living arrangement if I were to leave.  Conclusion: It seems as though I’ll never sell & get rid of the mortgage loan.  The issue now has to do with my cash.  As you all can remember, I am aiming to save 60% of my income, with sometimes hitting that target or slightly less, but nonetheless – I am saving quite a bit of money every month.  Therefore, I am sitting on cash that is earning me a whopping 0.75% if I am not investing into dividend paying stocks.  Talking with Bert, the question then is – do I pay down the mortgage or invest?  If there is no current stock opportunity do I start applying more extra payments here and there?  The question and thought has beaten me up for 3 years.

Paying Down the Mortgage Pros & Cons

Obviously, we are going to the pro & con list here to either: pay the down the mortgage or invest.  We will begin with paying down the mortgage.  Here are the benefits/reasons I can think of and the cons:

  • Pro: If no investment opportunity exists that has a P/E is undervalued enough with a dividend yield above your after-tax rate on your mortgage, extra payments to your mortgage is a way of investing as it reduces your time and interest to pay over the mortgage.
  • Pro: Making extra payments obviously reduces your time-frame of having the mortgage as all extra goes to principal
  • Pro: Builds more equity into your house by reducing your debt, thus the fluff of networth grows
  • Pro: Building the equity, mentioned above, also allows potential for Home Equity Line of Credit (HELOC) opportunity, which essentially is using collateral (house) and borrowing against that at a very low interest rate, which then the funds could be used for other investing opportunities at a low cost of borrowing
  • Pro: If stuff “hits the fan”, selling the house will provide more than just enough to cover the remaining mortgage
  • Pro: If down the line I rent this out or live in it with a family (fingers crossed haha), it’ll be nice to look back knowing that the extra payments would allow my family to live debt free here or with rental – increase my positive cash flow.
  • Con: Missing investment opportunities
  • Con: Using excess cash by placing it into an illiquid investment (an asset that is difficult to sell or move quickly)
  • Con: A natural disaster could wipe the house out, but insurance would be there.  Just would be sad!
  • Con: In case rates go lower than they’ve ever been, which I don’t expect to happen, it may not/would not make sense if I’ve made all of these extra payments at this rate

Phew, now that those bulleted points are there showing the benefit to pay down the mortgage or invest into the market.  From what I can see looking at the pro/reasons & cons to paying it down – if there aren’t any investment opportunities and you are sitting on idle cash that you don’t plan on using (wedding, wedding ring, new rental property, a business, etc.) then – why wouldn’t you pay down the beast?  If you started making extra payments and say in 15 years it’s over – I just freed up quite a bit of cash flow in my life.   Well, let’s see pros & cons to investing instead.

Investing Pros & Cons

  • Pro: Investing instead of paying down allows you to buy a dividend cash flowing asset that covers the monthly cost of living.
  • Pro: Buying an undervalued dividend paying stock allows further appreciation for a stock security (but who really cares about appreciation)
  • Pro: Buying a dividend stock allows dividend reinvestment, which ultimately buys more assets and increases your cash flow automatically, so the true yield of your investment is larger than the current yield.
  • Pro: Paying down your mortgage here and there vs investing does not impact your cash flow today, but does so at a later time.  Dividend stock investing impacts your cash flow immediately upon ownership and purchase.
  • Con: The dividend stock may cut their dividend
  • Con: The dividend stock may depreciate or not grow their dividend
  • Con: Dividend tax rates could go up to ordinary income levels, effecting your after tax of receiving dividend income, essentially reducing the amount you are receiving
  • Con: The company may go bankrupt
  • Con: Bond rates could all of a sudden triple or CD rates could spring back up to their previous highs, thus causing you to think about selling your dividend stock, pay capital gains tax + fees of the trade

Pay Down the Mortgage or Invest Conclusion & Help

I am here really to see what the community would do.  Right now this is what my gut says: If I can’t find an investment opportunity in a given month (aka no stock activity from using our screener) and I have saved what I typically have done with no need for more emergency cash or upcoming life event (such as the wedding, a ring, a business investment etc) – I would make an extra full month payment.  My payment is roughly $447 per month and with my investment purchases always seeming to float in the $1.5 – $2.5K range, this doesn’t total deter/eat into my fund to invest into the market.  But I just still am not sure.  Would you pay down the mortgage or invest into the stock market if you had idle cash?  Would you make an extra payment in a month that you had no stock investment activity?  Would you all of a sudden split what you do with your savings, say 75% to investing and 25% of your savings every month goes towards the mortgage?  What if you were in this scenario: Stocks were at all time highs that you were interested in, dividend yields were around 2-2.50% on equities, you have not purchased a stock in 2-4 weeks and you are sitting on a full month’s worth of savings – would you make an extra payment then or wait in cash at 0.75%?  I know this is going to be all over the place, but your responses, considerations and viewpoints are critical!  I have struggled with this battle ever since owning my home.  Would love everyone’s input – so thank YOU.  I know it’s been discussed before to either pay down the mortgage or invest but I need to make an action!  Can’t wait to read what you all think, hope everyone had a great weekend!


59 thoughts on “Pay Down the Mortgage or Invest, that is the question

  1. As a new homeowner, this is something that Ive been thinking quite a bit about lately. I think a balanced approach is best – keep paying down mortgage and make extra annual payments.
    Unfortunately for us Canadians, the mortgage interest is not tax deductible, so, if theres any extra cash with no great investment opportunities, then definitely pay down mortgage I would say.

    However, its good to have some extra cash on hand – to take advantage of any potential crashes in the market.

    Best wishes

    • R2R,

      Appreciate the post. I do agree that having a balanced approach is reasonable and prudent. If there are no opportunities that you see fit, then applying extra cash to your mortgage here and there isn’t a bad thing, whatsoever. Obviously makes more sense to pay it down further if the interest is not tax deductible, as you don’t receive the benefit of paying the interest. Always having extra cash for a stock opp is clutch. I don’t plan on making large $2K payments every month to the mortgage, but the occasional $500 every 3-4 months wouldn’t hurt, right? Thanks for your thoughts, talk soon R2R.


  2. Lanny,

    This is an interesting topic. I personally bought my house in 1997 and paid the minimum payments during the first 10 years of ownership. I made some shaky stock purchases around the year 2000 and immediately wished that I had stayed out of the stock market. At that point I still had the mortgage, car payments and credit card debt. I immediately did a 180 and sold my stocks at a loss and focused on debt reduction. By 2009, after eliminating all credit card and car payments, I had almost enough in savings to pay off my mortgage balance. In October 2010 I owned my home free and clear. There isn’t a paper return that can make you feel better than never having to pay again (taxes aside) for your shelter. Also, once the home is paid for, the odds of looking for a new home (new and potentially higher payments) diminishes greatly.


    • MDP,

      AWESOME and congrats on being free and clear. I do look forward to the day of no mortgage payment and only taxes or something smaller than the P&I. So would you say that back in the year 2000 – you wished you would have applied more towards the mortgage than the stock market? What would you go back and change and tell a previous MDP to do instead? I guess what is your decision matrix or your suggested plan? Would appreciate on your guidance and am curious. Thanks MDP, talk soon.


      • First open a HELOC for emergencies. Then immediately throw every dime of savings and all disposable income at your mortgage. Most people can probably be totally debt free in a few years. The HELOC takes some of the fear of having no cash during the paydown period. Again operating with no safety net is a bit uncomfortable, but the HELOC is there for extreme emergencies. Good luck!


        • MDP,

          Thanks. Interesting. Take out the HELOC on the equity. Take savings to pay down the mortgage which has a higher rate than the HELOC. Hmm… Have you then done this before and has worked in your favor?


          • I’d say open a HELOC as your emergency fund… Throw every penny into the market. If there is an emergency use the HELOC to float yourself, until either you can get back on your feet, or if need be cash in some of your investments.

          • Thanks Ben,

            I definitely understand the rates of return and cost of borrowing. I am in both for the long term – owning this mortgage and owning my investment dividend paying stocks. I’ve been on the course of placing all excess cash outside of emergency funds into the stock market and making the 1 extra payment per year. I will have to see what HELOC/how much LOC I can pull given where my house can be appraised at (I bought in 2011 and the market has improved since then). This is all very interesting – I appreciate the tips/viewpoints Ben.


          • Ben nailed it on the head. The HELOC is opened for emergencies only. Since you will be throwing every penny you make at your mortgage for several years the HELOC acts as a safety net since your checking account will have next to nothing in it during this time!

            Good luck!

          • MDP,

            Okay. I see the points. I’ll have to see what % my HELOC would even cover (I was fortunate to do a 5% down no PMI mortgage), as my equity may not be as high. I understand that using every last bit in my pocket book at the mortgage, but something about also investing into dividend stocks has to happen. Building a cash flowing asset + rocking home that mortgage debt sounds like a game plan. This is something I want to have buttoned down going into 2015. If not earlier.


  3. Interesting topic. As R2R already pointed out, mortgage isn’t tax deductible here in Canada unless the mortgage is for an investment property. So that kind of limits our choices. If you were a Canadian I’d say pay down your mortgage first.

    I think a balance approach is probably the best. Try to increase your mortgage payment and also use small part of the money to invest, assuming you can find good investments of course.

    • Tawcan,

      You’re right. Balanced approach. Now what would your decision tree be that would cause you to apply more towards your balance? I find this interesting to see if there are different perspectives and different approaches. Thanks Tawcan, hope to hear back.


  4. I absolutely think paying down debt WHILE investing is the best move. If you can’t afford to do both, then kill debt. Nobody ever got into financial trouble being debt-free that I know of.

    I wrote about the killing the mortgage vs. investing debate on my friend’s site.

    “In closing I believe most sound (and successful) investment portfolios are a balancing act of managing risk for reward. Most Canadians would be best served by managing risk (reducing debt) and striving for reward (building retirement savings), becoming proficient in each.”


    • Mark,

      Thanks again for your comment. I agree – “nobody ever got into financial trouble being debt-free”. Also, just read your article. Well said – do both. I think this is an approach I will do on a quarterly basis, say $500 every quarter. I am starting to see the trend of balancing this out. I guess – how aggressive do you do both? Even? Say you save, for example, $1000 per month. Do you use $250 towards mortgage and $750 towards investments for a 25% to 75% split, or is it more 50/50? Huge debate going on and I love it.


  5. I’d say debt comes first. There’s just so much flexibility when you don’t have any bills to pay. Plus, you can’t go broke unless you owe someone something or do something really stupid. So yeah, I’d take peace of mind over some profits any day. Leverage looks great on paper, but when multiplied by zero it still is zero.

    • Henry,

      Thank you. Now would you say that given a low 4.375% interest rate? Are you then saying every extra dollar you save to put towards the mortgage then and to not use any for investment purposes? Thanks Henry, would love to hear back.


      • I would still pay it off given the low mortgage rates. What if you lose your job and such? Not that something like that would happen, but you never know. It may sound great that you can arbitrage the interest rate with investments, but all that profit can quickly disappear if something unforeseen happen.

        I believe the borrower is always slave to the lender. So I just avoid debt. Leverage is for those who don’t have patience. If you spend less than you make and just be patient, then you can’t help but become wealthy, per Warren Buffett words haha.

        • Henry,

          I understand the standpoint of being a slave to the lender and having chains on the wrists when owning a mortgage. This is such a rock and a hard place discussion, that it’s very interesting. On one hand I get pumped to pay it off, and on the other hand I think – Oh – let me just pump up my dividend income by buying stocks. Maybe I incorporate into my annual goal to make $2K of extra principal payments for 2015, etc.. Thoughts? Curious Henry, talk soon.


    • Ben,

      I definitely understand this stance. If your potential ROI > Cost of borrowing = continue putting everything towards those investments. What if the market were at all time highs, you expected ROI to possibly decline and your yields were expected to be lower… aka what does your gut tell you? Thanks Ben.


      • If your investing for the short term, then that is obviously something to seriously consider. I’m in for the long term on my investments, so I don’t really care what happens next month, next year or 3 years from now. If I see a company that makes sense to invest in, unless there is a significant change I would expect the avegage return over a long period of time to be considerably higher than my mortgage cost. In my mind it is as simple as that. I work as an advisor and it amazes me the emphasis people put on paying down their mortgage, or establishing an “emergency fund”. If you were the most conservative investor on the planet I see some merit in paying down the mortgage as well as investing, otherwise it just makes no sense to me. Its very realistic to see a long term return of 8% in the markets, paying down the mortgage would save you 2.5 – 3.5% now….

  6. Hmmm… tough situation, as there are pros and cons to each side. Personally, I would focus on the investment side of things with your current income and retry the roommate situation. Any proceeds from the roommate, plus perhaps some rounding up ($500 per month) gets tacked onto the mortgage payment. Of course, given your prior roommate experience, this might not be a desirable situation.

    Perhaps once your debt gets a bit lower than the $84k mark, you evaluate your cash savings and cash flow, and just knock it out in a year or two. As MDP said, open up a HELOC, put everything but a couple grand into the loan, and wipe it out for good. At that point, your savings rate would jump even higher, however, at $84k, the cash flow “pay-off length” doesn’t quite justify this just yet.

    • W2R,

      Thanks. I obviously have my experiences with a roommate and haven’t quite written off every having one. I think I just had almost the worst case scenario FOR having one, right…? haha I am hoping.

      What if I don’t make an investment for a while and my cash sits in a 0.75% savings account? Shouldn’t I at least put it to long term work by making an extra payment every now and again? Thoughts on that situation?

      I’ll have to look into the HELOC option. This debate is heating up, I love it. Thanks W2R, excited to hear back.


  7. Well, I don’t own a home, and don’t ever really intend to, but I would pay off the mortgage over investing. That’s just me, of course, and your article summarizes both sides of the argument very, very well. I just hate debt with a passion, and I couldn’t sleep very well with a mortgage overheard. Definitely wouldn’t retire early with one, at least.

    • DivDev,

      Thanks for your stop by – saw your blog – pumped you’re getting it going and seems like you have a nice sized portfolio at 23, congrats! Its starting to look like its more of a personal attribute now to the investing and paying off the mortgage. Yields are looking nice right now with dividend stocks, as this week took a bit of a spill (hoping it continues) but I may be falling into the area of – having a goal set to add more towards principal, I believe I said somewhere around the $2K mark. It’s not a complete balanced approach but a 90%/10% approach (invest/mortgage). We’ll see what my gut/heart says. Math is math of course, but something about the trait of unpredictability…


  8. To me it is all about the spread. If you can make more on an investment than the interest rate of your mortgage, then buy the investment. If you go by Robert Kiyosaki’s definition, your home is really a liability since it doesn’t generate any income. I know we have all been raised to pay of our mortgage, but when you do that, all of your capital is tied up in a non-income producing asset. I am all about generating passive income from all of my assets.

    Deets LaMoss

    • Deets,

      Thanks for stopping by, we really appreciate it. I am a huge kiyosaki fan, through and through, in fact have read multiple books by his rich dad team. Home is a liability unless you are renting it out to generate cash flow. Bottomline = Invest into assets that produce cash flow for you. Done and Done. Any guidance though if you don’t currently have an investment that doesn’t produce more cash flow than your liability? What are your thoughts? Thanks Deets.


      • In my case, I have a 30 year fixed rate first at 3.75% that I don’t care if I ever pay it off. I will never pay that one down when I can earn more investing it elsewhere. I also have a HELOC that I have borrowed $100K at 3.1% that I have invested earning 12%. Not sure I answered your question, but that is how I am doing it.

  9. Hi Lanny,
    My 30 year mortgage is also at 4.375% and I’ve chosen to not make a dedicated effort to pay it down quickly. My reasoning:
    1) Inflation is reducing the mortgage payment every year as a percentage of my income.
    2) If I went 100% on paying it down, I’d have no capital to invest and little dividend income at precisely the time when compounding gives investing the most value (when there’s more time for it to compound)
    3) If my income portfolio is more than the value of my mortgage then I no longer have to worry about mortgage debt as I can chose to pay the mortgage whenever I want to.
    4) I remain confident that I can gain more than 4.375% over the long term via the stock market.

    That said, I am taking a balanced approach but tilted towards investing; I save a small amount in an index fund towards paying off the mortgage early that’s separate from my income portfolio. I’ll use that fund to pay the mortgage early but I’m not in an urgent hurry, so I’m something like a 85% (invest) / 15% (mortgage) split.

    It seems to me that you’re leaning towards a balanced approach too. As for percentage split; I’d let the math figure it out. 1. You know how much you can spend towards investing & mortgage; 2. you know how much interest you’ll save by paying the mortgage off by a particular year; 3. how much interest do you want to save? 4 How much money do you need to pay each year to reach that particular date. That will tell you the amount of the split.

    Best wishes,

    • DL,

      One word and pardon my language – DAMN! Now that’s a detailed analysis. I agree – you will have an increase in value well above the 4.375% and inflation does reduce the mortgage payment every year. And I like how you knew I’m very far away from thinking 100%, I was even going crazy to allocating 10% of my savings every month towards it, maybe less even, but “something”, you know? I will have to crank through the numbers and update everyone on my goal for it. Such as, I am aiming to add $1,600 or $2,000 in extra payments for the year of 2015. But you’re right, I need to know my end goal of the mortgage. Is it by 2025? 2030? Etc.. Calculators are a great friend eh? I like where your head is at.


    • DL,

      Thank you! I was looking for some insight and found what i was looking for in your post. Really appreciate it.


      Thanks for raising this question. I am going through same analysis right now and dilemma.

      Kind Regards,

  10. My mortgage rate is 6.125% and i pay about 1,000 a month to interest and principle. if I pay off the mortgage my disposable income increases by 18%, that’s a better return than i can get putting it into the stock market. Once it’s paid off then the stocks can really grow (or i find some other properties to buy)

    One thing to note, I already put about 15% of my gross into the market and my company puts in another 4.5% but any extra money i find goes to paying off the debt faster (with the exception of the occasional bottle of whisky)

    • one thing i forgot to mention, my house is an apt building and currently i only pay for utilities, the tenants pay the mortgage, insurance, etc

      • Nick,

        So you own an apt building and your tenants are paying it? I would almost think you have no incentive to pay that down if it’s being rented out – treated as an asset, you know? Let me know your thoughts. You’ve said that you pay about $1K to the mortgage, and you talk about paying off the mortgage so – I guess my question is – are you paying this bad boy off then? Thanks Nick, appreciate your input!


        • Lanny,

          Yup, total mortgage payment (including taxes, insurance etc) is 1820 a month and with the tenant that is just moving in I’m collecting 1950 a month. About 1k of that is the actual principle and interest (where i am taxes are high)

          My situation is an interesting one. I have no student debt but bought the property right after college and over the years I’ve gathered more than I intended of credit card debt. Part of that is due to the various jobs I worked while trying to figure out what my career was going to be geared towards (first choice didn’t pan out well) I spent a few years in the construction industry (where I intended to be), then helped start up a hardware store and stayed there for a few years. I finally found a job that got me back into my field of choice, I was the material planner for a manufacturing facility. That job led me to the one I just started with a different company where I plan what the factory is going to make.

          Until the most recent job I was at the mercy of being fully rented mostly due to the debt i gathered the first few years after the construction industry. So now that I’ve gotten a substantial raise (71%) I’m investing again (about 15% and company will throw in another 4%) and all the rest is going to pay off my debt, the mortgage is on that debt list and I figure I’ll have everything paid off in about 4 years.

          So within 4 years I’ll have 0 debt, my tenants would completely pay for the building and most of my expenses and i would be able to invest close to 4K a month

          • also in 4 years my net worth would go from its current $852.97 to well over $250,000 (I already have over 200k in assets) and my current 12 mo forward dividends broke 1,500 this month (which i find impressive since i didn’t add to my investments for about 4 years)

  11. Your mortgage interest is tax deductible so it really is more likely in the ~3% range. With your growth dividend paying stocks, I’d hope you could return more than that through appreciation and dividends. I know it’s more of a mental game than anything. I’m in the same boat with student loans, but since I don’t get the student loan tax deduction anymore I’m in more of a hurry now than every.

    Also, I’m in shock with how cheap real estate is in Ohio being from the Northeast. Definitely jealous.

  12. I know this is a bit of an old post and you already made a 2015 plan, but the whole issue of debt repayment vs investing really intrigues me. From age 18ish to about 35, I was strongly in the camp that if you don’t follow the numbers, you’re doing it wrong. If your expected long-term net return is greater than your effective mortgage interest rate, it is just mathematically wrong to pay off debt with a lower rate. Now, at age 39, I have a much better appreciation for the concept of emotional well-being driving your decision on debt repayment. Personally, I’d still borrow to max capacity if the numbers worked in my favor, but since that would make my wife really stressed and uncomfortable, there’s no way the extra money down the road is worth her emotional well-being.

    Even so, we have 4.125% 30yr mortgage and we’d never pay it off early. Given that inflation has averaged about 3% historically and housing prices have tended to appreciate at or above inflation rates (long-term, even including housing crashes), we are letting inflation reduce the adjusted amount of money we pay for the house while the house maintains its present value (in future dollars), all while the money we would have used to pay it off earlier is throwing off 3% in dividend income annually and appreciating in value. We also have a really old student loan at 3.75% fixed rate (effectively lower after taxes) that we’re not about to pay off early.

    On a sort of half-side note, I remember in the late 90’s, when I lived in Oklahoma City, there was an older couple whose mortgage payment was around $350 per month on a house they’d owned 28 years. My rent in the cheapest 1-bedroom apartment I could find was $400 per month, while they were living in a nice 4 bedroom house worth well over $100k at the time. I guess that’s what 28 years does to the value of a dollar.

  13. Nice discussion. I’m on the flip side of the age equation approaching 58 but have been a good saver my whole life. I applaud your work of investing regularly. It takes a disciplined life to be a life long active investor but the payoff is worth it. This past year cash flow was leaner than prior years and I chose to pay off my mortgage and lower my monthly expenses with a portion of my investments rather than continue to play the game of betting on the market to go up. I chose to payoff the mortgage and decrease my investment portfolio but the benefits are huge by wiping out our debt and reducing our monthly expenses considerably. As mentioned in the blog, the location of your property and projecting to be a long time occupant was a big factor in our decision.

  14. Pay down debt on your credit cards before applying for a mortgage. Make your credit score look as good as possible. You don’t necessarily need to have a zero balance on all credit cards, but you want your debt ratio to be low, which inspires confidence in lenders. Don’t take on new debt while you wait for the loan to close, either.

  15. Debt is the 21st Century version of slavery. I avoid as much as I can. I use it only in rare occasions to increase my net worth and then reduce it back down to zero as soon as possible. In fact my overall goal is to have money moving toward me rather than away from me. It’s all about financial freedom and security.
    Dennis McCain

  16. I’m going to offer a slightly different take..

    I’m currently debt-free – don’t have a house yet, not much of an investment portfolio, but I also need to save money for IVF. At the moment I’m focused on increasing my investments and saving for IVF, getting into debt/getting a house isn’t even a factor for me.

    If I didn’t have to pay for IVF, I’d still choose investing over buying a house because for the long run, I want that security of having additional income – the house isn’t going to give me any money at all. I want to create a solid base of dividend income before even considering buying a house. Plus, the rental payments I’m paying are a lot cheaper than the rent payments.


  17. Hi,

    Have you thought at looking it from a Stock Analysis point of view? Do you analyse the LT debt/Equity ratio and if so, with what ratio does it pass your criteria? I recently decided to take a mortgage to fund a part of the house with debt so that i keep some cash in my pocket for investing and in case of emergency. The associated monthly payments will be approximately 15%-20% of our monthly combined income and that feels OK for me. Over the next few years i’ll figure out how much of it i’d like to reduce. I’ll pay about 3,7% rent so when buying dividend growth stocks I should be able to reach the same level in few years and from there my return should be higher than the monthly payment. My mortgage will be 25 years, so for me this feels like a wise investment. If some additional cash on hands and if it’s more than i need, i’ll consider to pay down the debt a bit quicker.

    Nice read, thanks!

  18. The way I see it , keep a balance. But it’s an easy way to cut your monthly costs. Especially with the current interest rate, my approach is simple and has been effective. Every month I check the amount of money I have left and divide it by 3 , I invest, pay of the mortgage and keep cash at hand. The latter until I have sufficient reserve funds. Then I will start dividing by 2.

    I think paying of debt (including the mortgage) should be an integral part of any (early) retirement plan.
    Look at it this way you save the interest of the money paid off during the time you have left on your mortgage , use that too pay off or invest some more. It adds up.

    I am very happy I decided to start paying off as fast as possible.

  19. You remove Debt first. Then you invest. I did this and now that tomorrow had arrived, and it does, I spend the unrequired dividends on my favourite charity. Regent Seven Seas….

  20. I like how you raise up this issue.

    It is the Question that I keep asking myself for my loans. I’ve resort to the idea of once my student loan get down to $30k, I’ll write a check to pay it off, because my monthly payment is $330, if getting rid of $30k means making my cash flow in surplus of $330, it’d be worth it.

    I’m paying cash for an investment house of $55k, because I can have positive cashfkow of $1200/mo. It beats dividend investing with this. It all comes down to cashflow, how annoy you’re with the payment.

  21. Let’s go with 3.75%
    That is your risk-free rate of return, and you should use that to calculate the return you should expect to see on your equities, and on the 10 year.
    It’s really a math question. My guess is that it would be more advantageous for you to pay off your loan.
    Otherwise, you could do half and half if you want to hedge, so pay off faster, but put more towards your loan each month, so you get the best of both worlds.

  22. I can add another pro to paying down the mortgage. If you don’t have a mortgage anymore it gives you a sense of freedom. For a lot of people that feeling is important. If it is for you, that’s up to you to decide. 🙂

    Pure from a financial point of view, investing has bigger chances of generating more money in the long run, but you keep having a debt. Paying the mortgage increases cash flow which can be used for investing. Also an interesting aproach. 🙂

  23. Hi Guys,
    New to the blog but loving it! Have a similar vision, working towards my fin indep. also, I try to diversify my investment portfolio with dividend stocks and covered call option writing. Pity we pay so much taxes on foreign dividends in Belgium… (they cut the dividend yield on American dividends in half…).

    I Always struggle with the mortgage question myself too! Luckily, my rate, after tax, is about 1,5%, that makes the question a bit less difficult! Another reason for me not to pay earlier is that I believe that $500 today is much more worth than $500 in 10 years. If you consider it in % off my total income, those $500 will be less important… in 10 years. Do you think that’s a correct way to approach it? I’m curious about your insights!

  24. Although an old post, I thought I’d share my thoughts also – not having a mortgage I suppose you can take it with a pinch of salt!

    If the loan account has a no-fee redraw facility, I’d throw the extra cash to the mortgage, as you can always re-draw it later. This would almost certainly be the best way to go as you could deploy excess funds to stock purchases fairly quickly.

    If no redraw facility existed, with a mortgage rate of < 4-5% I'd keep the cash in the bank, awaiting deployment in equities. Losing 2-6 months of interest at 4-5% p.a. is nothing much, considering you could deploy this cash at 8% in equities and compound it over 30+ years. If my mortgage rate increased to 6% or more, I'd start paying down the mortgage at an accelerated pace, for a good risk-adjusted return.

    There are probably several good options, this just being one way of approaching it!

    • WF30 –

      Thanks for the post. Not sure there is a no-fee redraw facility with the loan, I’ll have to look into it.

      Rate is at 4.375%. I balance out the approach at $500/quarter extra, which ends up being almost 4.50 extra payments per year. I more than likely can steer back on this. I think in 2017 I may do $250/quarter, we’ll see though, I love the fact that I’ve ripped off years off the loan already.

      But I do agree – I invest a helluvalot into the stock market – typically 30K of my own cash each year, which to me is quite a bit on what I make (including 401K, HSA, etc.). Building up that income stream is nice. Would love more cash flow bottomline, right?!


  25. Do you have other itemized deductions? I just want to consider the effect on taxes for a moment. I calculate that you only have deductible interest of less than $4K/year. With maybe $1K in property taxes, that’s still below the federal standard deduction. So unless you have other itemized deductions like charitable contributions, you’re not actually getting a tax break from this mortgage. I.e., if you didn’t have the mortgage, you’d be taking the standard deduction (and maybe are already).

    Overall, you can spend a lot of time and energy trying to optimize this, but both goals are good. So I think you figure out what you want more: the debt gone and the cash freed up sooner (but still not yet), or the ability to invest more now.

    My wife and I are 31 and 32, and we live in Fresno, California. We have a $190K house (bought in 2008), $72K left on the mortgage, now at a 2.875% rate (refi’d to 10-year fixed in Jan 2015). I’d rather pay just a little extra but not a lot, to have more to invest. She hates the debt, and gets a little nervous with the stock market (I handle all our investments and retirement). Her peace of mind is worth more to me than maximizing return. So we’re killing the debt first. ETA 3-5 years instead of 8.

    • Karl –

      My property taxes are $4,100 actually So almost $8/year essentially there. With yes – charitable contributions, and then you factor in state/local taxation, etc..

      DAYUM 2.875%, so nice and protecting that capital now. 3-5 years instead of 8 is awesome. How many extra payments per year are you making on average, then?


      • Lanny,
        Wow! Our property taxes are only $2K/year.
        Our required mortgage payment is $1,052. We’re paying $1K-$1.5K extra per month. We want to get the balance as low as possible before kids come along and we lose my wife’s income (25% of our total).

        • Karl –

          Jealous – wish my property taxes were that much, my property is just a tad over 1.4K square footage as well.

          THAT’S SICK! Paying an extra payment at least per month huh? That is ridiculously awesome. If you can do that and have a balanced life, then perfect, you are knocking in an intense amount off each and every month. How long have you done that for??


          • Our house is 1,750 sq ft. We just recently amped up the pmts a couple months ago. We’d been doing an extra half pmt per month since we refinanced, but we just finished some other savings goals (my master’s degree and a full emergency fund) and reallocated that cash flow to the mortgage. We want that debt gone!

            Another thing that also helped was reading your tax strategy about a month ago. The Roth IRA/401(k) used to be my soapbox. Now that I see the early retirement strategy, we shifted everything over to pre-tax. Especially while both my wife and I are working and our income is higher than it likely will be in a few years, this will be huge for us. Thank you!

            Neither of us have a HDHP to give us an HSA, but I did introduce my company to an FSA and I’m taking advantage of that.

  26. Interesting post. I see it is a few years old at this point. What has your strategy been? Has it been effective for you?

    Personally, I would prefer to not to pay the extra payments as:
    a) you would lose some of the interest deduction
    b) you would have the additional payments locked up/not easily accessible
    c) you could lose the opportunity cost of potential long term gains over the interest rate you have.

    As an example, if you put the money you would pay additional payments with into a savings account, you could potentially have cash available in a few years to take advantage of a potential dip in the market…or maybe use as a down payment for another property. If your money is tied up, it would be more difficult to react quickly to opportunities. You will have to pay the same amount in principle whether you pay it now or 20 years from now.

  27. Pingback: Re-Financing the Mortgage Plan | ResourceShark Blog

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