Pay Off Mortgage Early or Invest? Smart Money Moves Explained
When it comes to handling your mortgage, the question of whether to pay it off early or invest your money elsewhere is one that splits opinions. With historically low interest rates, rising inflation, and booming investment returns, this topic has become more relevant than ever. If you’ve ever wondered if keeping your mortgage makes sense financially or if it’s better to get rid of that debt as soon as possible, you’re in the right place.
In this blog, we’ll dive deep into the psychology, math, and market forces behind the mortgage payoff debate. Let’s explore why some experts say paying off your mortgage early is a mistake, while others swear by it for peace of mind. By the end, you’ll have a clearer understanding of how to make the best choice for your unique situation.
Understanding the Mortgage Payoff Debate
Why Are People Divided on Paying Off Mortgages?
About 50% of people think paying off a mortgage early is smart, while the other half believe it’s better to invest the money elsewhere. This divide largely comes down to how individuals perceive debt, risk, and return on investment.
A viral tweet by Mike Alfred recently stirred the pot by claiming that paying off your mortgage today is a sign that you don’t understand how “money printing and asset price inflation” work. He argued that with today’s extremely low mortgage rates, holding onto debt is actually an advantage because your money can earn higher returns elsewhere, especially in assets like Bitcoin.
This perspective may sound controversial, but it’s rooted in real financial principles. Let’s break them down.
Core Financial Concepts to Know
The Time Value of Money: Why Timing Matters
One of the first lessons in finance is the time value of money—the idea that a dollar in your hand today is worth more than a dollar in the future because you can invest it and earn returns during that time.
If you pay off your mortgage early, you’re essentially earning a guaranteed “return” equivalent to your mortgage interest rate. For example, if your mortgage rate is 3%, paying it off early means you’re saving 3% in interest costs. However, if you can invest that money and earn more than 3%, say 8-10% in the stock market, mathematically, investing makes more sense.
Inflation: The Borrower’s Secret Weapon
Inflation plays a huge role in the mortgage payoff debate. In an inflationary environment—like the one we’ve experienced recently—money loses purchasing power over time. This means the amount you owe on your mortgage stays the same in nominal terms, but your income likely increases with inflation, making those fixed payments easier to afford.
Put simply: inflation helps borrowers because the real value of their debt decreases over time. If your salary rises with inflation, but your mortgage rate is fixed and low, your debt is effectively shrinking in “real” terms.
The Federal Reserve, Money Printing, and Asset Price Inflation
Why Does the Fed’s Balance Sheet Matter?
Since the 2008 financial crisis, the Federal Reserve has massively expanded its balance sheet through quantitative easing—essentially printing money to support the economy. This expansion accelerated even more in 2020 due to the COVID-19 pandemic.
What does that mean for you? More money in the system typically leads to inflation, which pushes up asset prices like stocks, real estate, and cryptocurrencies. For borrowers, this environment usually favors keeping low-interest debt rather than rushing to pay it off.
Asset Price Inflation vs. Cash
Mike Alfred’s tweet mentioned how he could pay off his mortgage 15 times over with just the liquid part of his portfolio, hinting that holding a mortgage while investing in high-return assets like Bitcoin can be a winning strategy.
Looking at the data over the past decade, asset classes like Bitcoin have soared with annualized returns exceeding 200%, while traditional stocks like the S&P 500 have returned around 10%. Meanwhile, mortgage rates remain historically low, often below 3%.
This means your money could potentially grow much faster invested than the cost of your mortgage debt.
Historical Mortgage Rates and Their Impact
High Rates vs. Today’s Ultra-Low Rates
Back in the 1980s, mortgage rates were as high as 16-18%. Paying off a mortgage early then made perfect sense because the “return” on paying off high-interest debt was huge.
Today, mortgage rates are historically low, often below 3%. This changes the equation drastically. The guaranteed savings from paying off your mortgage early are small compared to the potential returns from investing.
How the Stock Market Compares
Historically, the stock market has returned 8-10% annually on average. If your mortgage rate is 2.5-3%, investing in the market theoretically yields a higher return than the savings from paying off your mortgage.
When Paying Off Your Mortgage Early Makes Sense
The Psychological and Practical Benefits
Money isn’t just math—it’s emotional. For many, the peace of mind that comes with owning their home outright and lowering monthly expenses is priceless.
- You might want to reduce monthly cash flow needs.
- You could be risk-averse and prefer guaranteed savings over market volatility.
- Family considerations, job security, or life changes (like having kids) might make paying off debt a priority.
If you value stability and simplicity, paying off your mortgage might be the right choice, even if it’s not the mathematically optimal one.
Paying Off Your Primary Home vs. Investment Properties
For your primary residence, paying off your mortgage can bring peace of mind. However, for rental or investment properties, holding onto debt often makes more financial sense, especially in inflationary environments.
Balancing Both Worlds: A Middle-Ground Approach
Why Not Do Both?
You don’t have to choose one or the other exclusively. Many financially savvy people split their strategy:
- Pay down some of the mortgage to reduce risk and monthly expenses.
- Invest the rest in higher-return opportunities.
This blended approach can provide a balance of security and growth potential.
Adjusting Your Strategy Over Time
Your financial decisions should evolve with your life stage and market conditions. For example:
- In a bull market with low rates, investing more might be wise.
- During a downturn or bear market, focusing on debt reduction could be safer.
Key Takeaways: What Should You Do?
- Understand your mortgage rate: If it’s high (above 5-6%), paying it off early is almost always a good idea.
- Consider inflation: Fixed-rate mortgage debt loses value over time when inflation is high.
- Compare potential returns: Investing in stocks or other assets with higher expected returns might grow your money faster.
- Factor in your personal comfort: Peace of mind and risk tolerance matter.
- Look at your full financial picture: Emergency savings, job stability, and other debts should influence your choice.
- Be flexible: Your strategy can change with market cycles and life events.
FAQs About Paying Off Your Mortgage Early
Is it always better to invest than pay off a mortgage?
Not always. It depends on your mortgage rate, investment returns, risk tolerance, and personal goals.
How does inflation affect my mortgage?
Inflation reduces the real value of fixed mortgage debt, making it easier to pay off over time with inflated wages.
Should I pay off my mortgage if I have kids or a family?
Many choose to prioritize paying off their mortgage for peace of mind and financial stability when they have dependents.
Can I do both—invest and pay off my mortgage?
Absolutely! A balance between investing and paying down debt often provides both growth and security.
Final Thoughts: Your Mortgage, Your Choice
The decision to pay off your mortgage early or invest isn’t black and white. It depends on many factors, including interest rates, inflation, your investment returns, and how much you value peace of mind.
Right now, with historically low mortgage rates and strong investment returns, many financial experts lean toward keeping the mortgage and investing the extra cash. But if paying off your mortgage gives you comfort and reduces your monthly expenses, that’s a valid and wise choice too.
At the end of the day, personal finance is personal. Listen to your numbers, your gut, and your lifestyle needs.
If you’re somewhere in the middle like me, you might find the best results by doing a bit of both—investing smartly while chipping away at your mortgage.
Thanks for reading! If you found this post helpful, share it with a friend or your investing community and keep the money conversations going.
Stay financially savvy and enjoy that peace of mind, whatever path you choose!
