Pay Off Debt or Invest

Paying off debt versus using the money to invest in other opportunities is always a decision that I struggled with over the years. When I started out in real estate investing, I purchased rental houses, and I would pay down the mortgage each month by adding an extra $100/month to the principal and I could see that over the years this had positive effects of increasing my equity. However, I’m thinking a little differently these days. I now make my regular PI payment but do not add additional principal each month since once that money is locked up in the property, I can’t get it out unless I refinance or sell the property.  Plus, I now have plenty of equity and would rather have access to my funds when a good opportunity is presented.

I will walk you through what you need to consider before making these decisions including the pros and cons of each choice. The idea of owning your own home outright and being debt-free is enticing and therefore many people consider paying off their mortgages.  I will start with the benefits of paying off your mortgage early.

1. You will save on interest.  As you pay down the principal of your loan you will ultimately be paying less interest over time, and it will benefit you in the long run. 
2. You will help your credit score by paying down your mortgage and reducing your overall debt.
3. You also build equity in your house and now you can leverage the equity to cover any big expenses that might come up in the future.

The drawbacks of paying off your mortgage early are:

1. You may not build as big or fast of a retirement with respect to other asset classes like stocks and bonds.  It will also take longer to build an emergency fund. These may be other financial goals that you have which grow at a slower rate since you are putting most of your money back in your home.
2. You will lock up your money in an illiquid investment and if an emergency funds are needed then you will not be able to access them quickly like you could by selling a few stocks.
3. Once you pay off your house you will no longer get the mortgage interest deduction and the tax break associated with that. If you can’t afford to contribute to your retirement savings while paying down your home loan, you’ll be missing out on that tax break as well since most retirement accounts have tax advantages.

Overall, I think you must evaluate your tolerance for risk and if you do not have a long investment timeline or are risk adverse you may want to consider paying down your mortgage which is a sure bet versus buying stocks for example.  Ultimately the decision to invest in paying off your mortgage is a personal one. It is important to look at your financial goals, your risk tolerance, and your current financial situation to make your decision.