Should I pay off my mortgage or start investing?

Question

I'm months away from paying off my mortgage. I had planned to research 1st quarter, pay off debt and then hit the ground running.  I have no desire to househack. So now I'm wondering should I take that lump and use for down payment instead of paying off my mortgage.

Nathan Gesner · Answer

I generally don't recommend paying off real estate. The benefits of a mortgage are an important part of the strategy. Even though this is your primary residence, the benefits can still be the same.

Read a few books on real estate investing to learn the power of leverage. I like the Unofficial Guide to Real Estate Investing. Here's a very basic explanation to get your juices flowing:

Assume a house costs $200,000 and rents for $1,500. The market appreciates 3% per year.

Pay cash for one house and rent it for $1,500. After five years you'll have earned $90,000 in rent income and gained $34,000 in appreciation.

Buy four houses with $50,000 down on each. Mortgage payment is $1,000 on each house, so you're essentially earning $500 per house or $2,000 a month. After five years you'll have earned $120,000 in rent income and gained $136,000 in appreciation. You've earned $132,000 more by splitting your money and leveraging it.

Jon Puente · Answer

Hey Candice,

If you are months away from paying off your mortgage, then it doesn't really matter either way.  Some will say "Be debt free!" and some will say "Leverage your money!"  It really depends on your risk tolerance.

The truth is that if you payoff your mortgage, then you take that payment (you used to make) and stack up as quickly as possible to invest.  If you do not pay off your mortgage, then you have money readily available to invest, but you also have a mortgage payment on the side.

But if we are only talking a few months then it does not matter much, unless you need that money right now.

Jared Hottle · Answer

I think if you have a good interest rate probably best to not pay it off as you will be borrowing money at a much higher rate and the opportunity costs would be higher. If rates are similar could pull a Heloc on your personal residence and use that to fund a BRRR or could refinance to get a lumb sum to go invest.

If you do not want to make income from your house could also just pay it off and leave it as it is a liability not an asset

Rick Albert · Answer

You need to look at your amortization schedule. If you are only a few months away from paying it off, you likely already paid most if not all of the interest on the loan already. Therefore there are virtually 0 savings by paying it off early. You are just "feeling" better.

Steve Vaughan · Answer

I paid mine off a couple years ago, then got a large heloc as an opportunity fund.

I don't have a regular payment if I don't use it, but have the liquid if a juicy deal comes along.

Candice Ravin Woodfin · Answer

Thanks, I'm a nurse and use to call Dave my uncle 🤣🤣🤣

Eliott Elias · Answer

Keep your mortgage, use the money to househack. Paying off the mortgage does not create any more wealth for you.

Lawrence Potts · Answer

@Candice Ravin Woodfin I’d talk to a real estate investor friendly lender and get their opinion on it. We are only looking through a small lens of your entire financial situation, risk tolerance, goals, etc. So a lender will be able to sit down with you and go over all of those things with you.

If you’re only months away from paying off your mortgage, it seems to me you are very conservative with your risk and I’d say continue to pay that off and save your money for a down on the next property. There’s nothing wrong with that strategy. Everyone’s goals, risk tolerance, etc., all differ, so whatever makes the most sense to you is what you should do. Good for you in getting that almost paid off!

Scott E. · Answer

As others have said, this is going to come down to your personal preference. You are already clearly very financially responsible if you've found yourself months away from paying off your primary residence.

I'm a big advocate for using leverage. But if I were in your shoes I'd pay off your mortgage in the next couple of months. Then spend the following several months saving up for a down payment on an investment property.

It's going to be a very good feeling having your home paid off. The peace of mind that will come with eliminating that debt is priceless.

Should I pay off my mortgage or start investing?

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