When you buy a house, the resulting mortgage can feel like a weight on you - mentally and financially. If you end up with a surplus of cash, you may wonder if it’s better to pay off your mortgage or invest the money in the stock market. Should I Pay Off My Mortgage or Invest

This is a common question in personal finance circles. Some people believe paying off your mortgage is a good investment, while others think putting your money in the market is a better option. 

Who is right? The answer is complicated. No two people face the same financial situation. What is right for one person may be the wrong move for someone else. Let’s talk about when it makes sense to prepay your mortgage and when it makes sense to invest.

What to Do Before Paying Off Your Mortgage or Investing

Before going into paying off your mortgage vs. investing, let’s talk about when neither of those is a good option. Sometimes, if you have extra cash, there are better ways to spend it. Here are some scenarios that may be a better option. 

Consult with a financial advisor

When you find yourself with extra cash - be it from an inheritance or an insurance payout - it may be tempting to spend it. Use it the right way and you can reap the benefits for years to come. Spend it heedlessly and you won’t know where it went. 

Financial advice on the Internet is generic and doesn’t take into account your individual situation. What works for some people may be the wrong move for you. That’s why it’s best to talk to a trusted financial advisor who can take full stock of your finances.

A financial advisor can look at the full financial picture and make recommendations that fit your individual needs. Whether that’s paying off your mortgage, investing for the future or something else, it will help move you closer to achieving your financial goals. 

Build an emergency fund

If you don’t have an emergency fund, this should be the first order of business if you find yourself with extra cash. An emergency fund serves as a cushion between you and financial calamity.

When you don’t have savings to cover unexpected expenses, you end up putting extra expenses on credit cards or scrambling to cover your bills. Having an emergency fund will help you pay for an unexpected car repair or a new water heater when the old one busts.

Aim for three to six months of living expenses to cover you when Murphy comes knocking on your door. If you dip into your fund to pay for something, make sure you build it back up to its previous level. 

Pay off high-interest debt first

When you have high-interest debt, this should be your priority for any extra cash. Interest can add up, increasing your loan balance, and extending the time to repay the total amount.

Any extra money you can put toward paying off the loan will take months if not years off the repayment timeline. Most mortgages are low-interest debt, hovering around 4 to 5 percent. If you have higher interest debt (some credit cards can go up to 30 percent or higher), focus on paying that off first.

Once you have your high-interest debt under control, you can look at investing or paying down your mortgage if you still have extra cash. Make sure you also have an emergency fun in place to prevent you from taking on more debt.

Get employee retirement match

If you have a healthy emergency fund in place and no high-interest debt, the next order of business is looking at your retirement contributions. 

Does your employer offer a match on contributions to their retirement plan? If so, make sure you’re contributing enough from every paycheck to get the full amount. This is free money that you can use to grow your retirement stash. 

For example, if your employer matches dollar for dollar the first six percent of salary that you contribute to your retirement account, make sure you’re putting at least 6 percent of your salary away. This means you’re getting 12 percent of your pay added to your retirement account for half the price. You can’t get a better deal than that!

Should You Pay Off Your Mortgage or Invest?

You have a healthy emergency fund, you’ve paid off your debt, and are getting your full employer match. If you still have extra money you’re looking to use in the best way, you may consider paying off your mortgage or investing.

Which one is better for you? Let’s look at the pros and cons of prepaying your mortgage vs. investing in the stock market. 

Pros of paying off your mortgage

Sometimes, it makes sense to pay off your mortgage. Here are some reasons prepaying the debt may be the right move:

Cons of paying off your mortgage

Even if prepaying your mortgage is an attractive idea, it may not be the best use for your extra cash. It’s important to evaluate both the upsides and downsides of such a decision. Here are some reasons prepayment may not be a good idea:

Pros of investing

Instead of prepaying your mortgage, you may consider investing in the stock market. Here are some reasons this may work for you:

Cons of investing

If you’re considering investing in the stock market, it’s important to understand the potential downsides to such a move. Here are several reasons this may be a bad idea:

The Bottom Line

There is no clear winner between paying off your mortgage or investing. Yes, stock market earnings have outperformed the ROI from prepaying your mortgage, but this strategy requires staying the course.

For many people, the peace of mind of owning their home outright far outweighs the money they can make in the stock market. In addition, investing in stocks for the long-term means weathering the ups and downs of the market. 

Which direction you choose depends on your individual situation, risk tolerance and long-term goals. 

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This is a post from Clint Haynes, a Certified Financial Planner® and Financial Advisor in Kansas City, Missouri. He is also the founder and owner of NextGen Wealth. You can learn more about Clint at the website NextGen Wealth.