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Pay Off Your Home or Invest the Money?  I Propose a Compromise

Pay Off Your Home or Invest the Money? I Propose a Compromise

There are strategies for paying off your home early.

Those strategies are great and they work.

But is it worth it to pay off your home early?

With mortgage rates being so low, why not invest the extra money instead of paying off your home?

I really don’t think you have to pick. I think you can do both.

If you want to pay off your home early, this may be the best strategy for you.

Let me explain…

Meet in the Middle

I haven’t read about this strategy before, so I am just going to claim a name!

I am calling it “meet in the middle”.

Since there is a big debate about whether you should pay off your mortgage early or invest that extra money, let’s look at both sides.

For this article, we will refer to these two crowds as the “OCD Investors” and the “Debt Haters”.

Pay off your home, or invest the money

Do you need a visual? Let’s use Warren Buffett as the OCD Investor and this random screaming guy as the debt-hater. Calm down debt-hater, you can pay off your debt, just stop screaming so loudly.

The “OCD Investors” think, with mortgage rates being so low, you can earn more money by investing than you can save by paying off your mortgage early.

The “Debt Haters” think, as long as you have a mortgage, you are in debt. And they hate debt (hence the name).

So, who’s right? Both of them.

Can’t We All Just Get Along?

I have devised a plan.

A plan to unite OCD Investors and Debt-Haters everywhere.

Free Hugs

Awww, they’re hugging. That’s adorable. I knew we could all get along.

It’s as simple as investing the extra money you would be putting towards your home.

Keep steadily investing until you accumulate the amount that you owe on your home.

Or, in other words, until you meet in the middle.

To start, just figure out how much you can contribute each month and start investing.

Make sure to use a separate account from all your other investments.

If you can’t afford the fund you want, start with a mutual fund that has a smaller initial investment, then keep upgrading once you have enough for the fund you want.

Once your investment is worth the amount you owe on your home, pay it off.

Is This the Best Mortgage Strategy?

This is only the best method if you can get a high enough return on your investment to earn more by investing than you would save by paying extra on your mortgage.

Usually this strategy wins, because you should be able to get a low mortgage rate right now and your return on some good basic index funds should yield a high return.

To calculate your situation, you need to figure out:

  1. Your available amount to invest
  2. Your mortgage interest rate
  3. Your specific tax situation

Simple Steps: Once you know how much you can contribute, use this calculator to see how many years and how much money you would save by paying extra on your mortgage. Then use this calculator to see how much you could realistically earn by investing.

This strategy works great for some, but not for others.

Happy Boy, Sad Girl

Don’t be sad if it doesn’t work for you! There are more options!

For example, if you’re interest rate is really high, you may want to refinance. If you can’t refinance for some reason, it may be more beneficial to pay extra on your mortgage.

The thing about this strategy is that it works extremely well for those who are in the right situation to make it work.

There are many variables, especially interest rates and taxes…

Watch Out for Uncle Sam

Obviously, it wouldn’t be worth your time to invest all this money, only to pay high taxes when you withdrawal to pay off your mortgage.

There are some ways to accomplish this strategy tax-free…

If you will be over 59 1/2 when you pull the money out, you can put it in a Roth IRA (if you meet the requirements).

If you are in the 10% or 15% tax bracket (USA), you pay 0% long-term capital gains taxes (long-term means gains on assets held for longer than 1 year).

Of course, tax brackets can always change, but they will most likely remain very low for the bottom tax brackets.

Tax Slave

Who doesn’t love taxes? What? Everyone? Oh yeah, that’s right.

If you don’t have any options for tax breaks, you may have to do some more math. If you’re in a higher tax bracket, it may benefit you more to simply pay extra on your loan.

Just make sure it makes sense when you calculate your rate-of-return, taxes and interest rates.

Every situation is different.

Final Thoughts

This strategy is not for everyone.

You may not be able to make this method work.

Calculate the costs. If this method doesn’t make sense for you, you will have to choose a side, my friend.

“Debt hater” or “OCD investor”.

Figure out what is more important to you. Being debt free or creating the most possible wealth.

There is no right answer. It’s about your priorities.

If you’re not sure whether this makes sense for your situation, just leave a comment or send me a message. I would be more than happy to run your numbers.

Will this work for you?

What are your thoughts?

Share in the comments!

Photo Credit: Images Money, Wikipedia 1, 2, Wikimedia, Marcus Hansson, Ryan

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Kalen is the main finance writer for MoneyMiniBlog. He came up with the idea of mini blogging. When Kalen isn't writing and maintaining MMB, he is generally busy being a husband, father, web designer and musician. He also serves on active duty in the United States Air Force.
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14 Comments

  1. A strategy well worth considering, Kalen, thanks. I think this technique would give ‘debt-haters’ some peace of mind as they watch their mortgage payoff fund grow and know that chunk of money is dedicated to debt payment.
    Kurt @ Money Counselor recently posted…Best Way to Prepay a Mortgage?My Profile

    • Hey Kurt,

      I think you’re exactly right. It’s funny that the “OCD Investors” couldn’t stand to pay extra on their mortgage if they know they can get a better return somewhere else. Yet “debt-haters” couldn’t stand to invest that money knowing that they had a mortgage to pay off. I actually fall somewhere in the middle, so this is the strategy I use.

      Thanks for the comment!

    • Hey Josh,

      Same here. It’s always one or the other. I try to unite. lol

  2. I think you’re the first blogger who has taken a middle-of-the-road approach to this topic. I love the visuals of the “OCD investor” and “debt-hater” haha. I definitely do not plan on putting any extra money towards my mortgage with my low interest rate :)
    DC @ Young Adult Money recently posted…Should You Start a Second Blog?My Profile

    • Hey DC,

      Thanks! I thought the visuals were appropriate. lol

      So, you’re an OCD Investor? haha Nothing wrong with that!

    • Hey Holly,

      Thanks for the comment! That’s great that it is working for you guys. My wife and I do the same and we have done really well with it.

  3. Great post…compromise is a good thing. I’ve noticed the 2 opposing views and both are pretty adamant about their side so I’m not sure this will placate them…but still a good method =) I rent so no mortgage but I do have a lot of student loans. I paid off the high interest ones and am not in a rush to pay the lower interest ones. I side on the OCD investor…but I’m not OCD about it! I’ll pay extra on it if the budget permits but I’d prefer to invest it.
    Andrew@LivingRichCheaply recently posted…Are You Suffering From Technology Overload?My Profile

    • Hey Andrew,

      You don’t have to be OCD, I just used that title. Lol

      You’re right about them both being adamant. That is so true! My method is definitely not for everyone.

      Thanks for the comment!

  4. I agree totally. I hate debt but I also believe paying off the mortgage early can be postponed while investing for retirement. I’m torn on the whole “invest in non-retirement vehicles until your investment is big enough to pay off the mortgage” idea but we are only 20 payments away from being 100% debt free anyway.

    We are at the point where the amount of money in our checking account is 50% of the mortgage payoff balance. If only we didn’t have to pay the light bill and eat….
    Steve MoneyPlanSOS Stewart recently posted…Top 5 Ways To Pay Off Your Mortgage EarlyMy Profile

    • Hey Steve,

      Eating just gets in the way sometimes. Lol

      20 payments? That’s awesome! Congrats! It sounds like you’re doing things the right way.

  5. This is the exact same strategy I am considering when it comes to paying off my student loans. I need to go through an evaluate if it’s even possible to achieve a return higher than my interest rate and go from there. Definitely worth it, but I’m torn because it would be great to just pay it off completely.
    Lauren @ Cheapstudents.ca recently posted…College After University: A Few Things You Should KnowMy Profile

    • Hey Lauren,

      I totally understand! There are psychological benefits to just paying off the loans, but if your interest rate is low and your debt is high enough, this method will work great. It shouldn’t be too hard to get a 7 or 8% return, or even higher. It sounds like you know how to evaluate it, so it’s really up to you, but I enjoy this method. It’s nice to see the investment grow and know that it will go towards your debt.

      Thanks so much for the comment!

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