What’s Better Financially: Paying Off Your Home Mortgage or Investing That Money?


“…if your house is your largest investment, you’re in trouble.” — Robert Kiyosaki

My household has finite income.

It turns out this is a common problem. When you have a limited amount of money coming in each paycheck, it can be very easy to have conflicting financial goals.

My wife and I find ourselves in this situation. Here are our top two long-term financial goals:

  1. Achieve financial independence through property investment.
  2. Pay off our personal home.

These two goals create tension, competing for every extra dollar that we can make available. It’s easy to have an “I want it all” attitude, but life has a way of forcing you to prioritize. Which of these goals should get the focus of our attention and money?

I’ve had this discussion numerous times with friends and colleagues. Across the board, the priority for most people is to pay off their home. Other than some retirement account contributions, most people plan to begin investing only after they are mortgage-free.

Is this the best way to approach this problem?


Risk and Reward

I understand the logic. If my home is paid off, then I’ll have more money available to invest. There’s also the risk factor: On the one hand, if I lose my job and my home is not paid off, then I could lose my home. On the other hand, if I lose my job and my home is paid off, then it’s just my investments that will suffer.

Related: Why a 30-Year (NOT 15-Year) Mortgage Gives You a Better Shot at Building Wealth

In a recent article, I explained how my wife and I followed the BRRRR strategy to purchase three rental properties and put all of our investment money back into our bank account. The purpose of the article was to explain how the BRRRR strategy works, regardless of how you obtain the money for your deposit and rehab costs.

However, I received a number of questions asking me about the way we actually obtained our initial deposit.

In our case, we got the money to invest in rental properties by refinancing our personal home. This is often referred to as a Home Equity Line Of Credit or HELOC. By doing this, we actually chose to get further away from the goal of paying off our home in order to purchase rental properties — the exact opposite decision that most people make. As was pointed out to me, this also means that we were paying interest on the money that we used for our deposit, as well as the money that we borrowed from the bank for the mortgage on the rental property. This is true.

But is it a good idea?

The fact that the BRRRR strategy eventually returns your money to you means that you’re only paying interest for a period of time. But even if this wasn’t the case, I would still do it. Why?


The Hidden “Mortgage Tax”

First, let me ask a question: If you have a mortgage on your personal home, is there anything that you can do with the money from your paycheck that doesn’t come with an interest payment attached?

If I have a mortgage on my home and I choose to spend $5 on a coffee, that is $5 that I could have paid toward my home mortgage, right? So really, I am borrowing the money for the coffee and paying interest. That sucks! In fact, this “mortgage tax” applies to everything you spend money on, including food and clothing, piano lessons for your kids, and popcorn at the movies.

It may not seem like much on a $5 coffee. But in reality, all of your paycheck that isn’t going toward paying down your mortgage is being charged interest. This really adds up. 

This line of thinking supports the theory that paying off your home mortgage should be your top priority. I think that this is what drives the majority of people to make this their top priority.

What Are You Planting?

But let me ask another question: If your plan is to grow a forest, would you plant a single tree and wait for it to reach maturity before planting a second tree? Of course not. Plant as many trees as you can effectively water. Right?

Related: Are Extra Mortgage Payments Worth It? A Look at the Numbers

It turns out that there is an exception to the “mortgage tax” rule: Money that earns a higher return than you are being charged on your mortgage is effectively exempt to this hidden tax.

Investments require time to grow. Whether you’re buying properties or investing in the stock market, it takes time to build real wealth. Most people who want to pay off their home before investing seriously simply can’t visualize the financial forest that they haven’t yet planted; they can’t see the forest for the trees.


Meet Adrianna and Dolores

Here’s a little thought experiment that presents one way of thinking about it:

Adrianna’s goal is to achieve financial independence. She sells her home and moves her family into a rental. Taking the equity from the sale of her home, she invests it in assets for the next 10 years. She implements a plan similar to the BRRRR strategy; after 10 years, she has established an annual passive income from her assets equal to the income from her job. Adrianna is now financially independent.

Financial independence means that Adrianna has options. She can buy a house if she chooses and pay the mortgage using passive income. It doesn’t really matter how long it takes to pay it off since she doesn’t have to worry about losing her job — she doesn’t rely on her job for income. She can also choose to continue working, pursue other interests, such as starting her own business, or just put her feet up and relax. Adrianna gained nothing financially from paying rent for 10 years, but she’s now financially free. 

Dolores thinks financial independence would be nice, but can’t imagine where she’d find the money to invest. She takes those same 10 years to pay off her home. After 10 years, she is mortgage-free and decides that it would be good to start investing. She then starts investing in assets. After another 10 years, she has established an annual passive income from her assets equal to the income from her job. Dolores is now financially free.

It took Adrianna 10 years to achieve financial independence, while it took Dolores 20 years to achieve the same goal — everything else being equal.

Pick a Strategy

The exercise shows two ends of the spectrum, given the same two goals: home ownership and financial independence. Obviously, there’s a lot of room to flex in between the two extremes. The correct answer for you might be somewhere in between. But at the end of the day, each dollar you earn can only be applied to one or the other. You must decide what you want to achieve.

In reality, if it is going to take you 20 or more years to pay off your home before you even begin to start investing, it might be worthwhile to reconsider your strategy.

The argument isn’t about math. It is qualitative rather than quantitative in nature. It’s about opportunity cost.

The way I see it, there are four ways to approach the problem:

  1. Don’t own a home at all. Rent a home and invest until you are financially independent.
  2. Buy a home that costs you less than you would pay in rent. You need a place to live, but if you’re paying less than what it would cost you in rent, then you effectively get to own the house for free.
  3. Pay off your home first. Whatever size home you have, pay it off before you invest. This might be effective if you start very young and pay it off very quickly, leaving you many mortgage-free years to invest.
  4. Buy a home for your family. But use this information as a guideline — purchasing more investments is always the higher priority.

Our family is actually using approach #4. We have looked into a number of options, including house hacking (a variant of approach #2). However, we have chosen to have a home in which to raise our family. We do this knowing the risks involved with having a mortgage on our home. And we also do it with an eye always to building our investment portfolio as the higher priority. This is why we have chosen previously to use home equity to invest in property — and why we would do it again to continue to grow our portfolio.


Protect Your Strategy

I’m not telling you which approach is best for you. In my opinion, getting a HELOC to spend the money on just about anything other than a solid investment is a bad idea. If you do decide that a HELOC is the way to kickstart your investment portfolio, remember this: All of the normal rules of budgeting apply. You need to be able to afford to make the additional payments on your home mortgage. And you still need to have 10 percent or more of your net income left over for future investing.

The key to accepting the risk involved with not having your home paid off is to mitigate it. A multi-factor approach can be effective:

  1. Establish an emergency fund. Most financial advisers recommend having an amount of money set aside equal to 3-8 months of expenses. Having such a fund buys you time. In the event that your lose your job, you have several months to pursue any number of solutions. You might sell your home, find a new job, sell an investment property to pay down your home mortgage, etc.
  2. Having various forms of insurance also helps. This may include life insurance if you have a partner or dependents, income protection insurance in case you become unable to work, or medical insurance to ensure that you don’t get financially sunk by illness or injury.
  3. Understand how to get your investment money back. You can reapply it to your home mortgage until you’re ready to invest again.

Whatever strategy you choose, make sure you understand both the risks and the rewards. Take steps to compensate for those risks. Then start planting a forest of wealth for your future.

What’s more important to you? Which strategy are you using?

Let’s discuss in the comments below!

About Author

Brad Lohnes

In 2013 Brad awoke from lifelong financial slumber and took responsibility for his family’s financial future. His primary vehicle for wealth-building is buy-and-hold real estate. He is passionate about financial education and helping others learn the tools they need to take control of their money. Brad believes there is nothing more empowering than self-reliance.


    • Brad Lohnes

      Hi, David. That’s right. I think with real estate the key is to first understand how things work, and then figure out the actual impact. In this case, for us, it’s the recognition that wealth comes from having investments that have time to grow. Cheers.

  1. I’m in the same boat as you, Brad. We have equity in our home, and are using our heloc to invest.

    I live in Southern CA, so my concern lies with the danger of a downturn, and not having the equity to continue to invest. I just wish I lived somewhere where the equity I have could be used more aggressively in finding multi-family investments. I feel like I really have to continue to find real estate outside of CA.

    • Brad Lohnes

      Hi, Jonathan. A downturn is always a possibility. To me, the issue there is equity. I talk about using equity to continue investing, but you need a certain amount of equity as a buffer. There’s no “correct” amount, since market fluctuations are unpredictable. But I wouldn’t want to ever leave myself with less than 20% equity in a home or rental. That at least gives me some buffer. Then, over time, we will be paying down the mortgage so there will be more equity in the future.

      Also – using equity is a “kickstarter” type of approach. If we are setting aside 10% or more of our income for investing, then eventually we should have enough for another deposit.

  2. Dan Arcaro

    Interesting post ! I thought it was a good idea also to pay down my home mortgage as quickly as possible. As a result, I have alot less cash that i could have invested in other properties. I’d be curious to hear the different strategies of people and also the positives and negatives of an equity line .

    • Brad Lohnes

      Hi, Dan. To be honest, this took awhile for me to get my head around. Paying off the home mortgage is almost instinctual. But I’ve see the positive effect of prioritizing investment.

      If you think about it, when do I want my home to be paid off (other than “yesterday”)? Well, about the same time that I have enough passive income to reach financial independence would be ideal as it would reduce the amount of passive income that I actually need.

      The real threat is waiting another 20+ years to begin investing. I could totally support a strategy of “blitzing” the home mortgage and trying to pay it off in 5 years or so. But there are only so many “springs” for planting. 🙂

    • Chad Carson

      Agreed, Michael. Risk is the harder part of the equation to quantify. But option #4 of leveraging up your residence has the most risk. Because until your investments are paid off, all of your equity is heavily leveraged and a downturn could wipe it out.

      I was personally fine with taking that chance in my case. But everyone has to make that choice. Brad did a good job of explaining the different options in this article.

      I personally look at all of my wealth building in stages like climbing a mountain. I don’t want to climb non-stop to the peak of the mountain (financial independence). That is exhausting and too risky. Instead, I like to climb for 5-10 years, reach a plateau of equity and income, take a break or change strategy. Then climb again. Your priorities might change at each stage. For me it has been to reduce risk at the cost of growth (like paying off your residence). But that’s ok once you’re higher up the mountain.

      Thanks for the thoughtful article, Brad!

      • Brad Lohnes

        Michael – yes, risk is always part of the equation. That’s why I tried to explain how I am mitigating the risk. Really, the point of the article is that a lot of people don’t consider the risk of NOT investing.

        Chad – that’s a good point. I think that market cycles encourage this “plateau” approach. We are currently on such a plateau. My local market is very hot, which means that the tide is in on equity, but buying is bad. So now we ARE focusing on paying down the home mortgage. But only until we start seeing good deals. Then our strategy will reverse, because, as pointed out in the article, investing is the priority.

        As I mentioned in a comment above, and should have mentioned in the article – I wouldn’t want to leverage below 20% equity to at least provide a bit of a buffer. We actually went to 10% the first time but we were lucky – the market was moving in the right direction. I wouldn’t go that low again. (Changes in local laws prevent it now anyway).

        • Brad Lohnes

          Hi, Victor. I mean that I would prefer to have at least 20% equity in my home. I completely understand that there are options and ways to have less than that and it’s worth discussing with an adviser. The main problem with having lower equity is that if property values decline then it can be difficult to refinance if you want to for any reason. I’m not 100% on the laws in the US, but I know that banks hold loans against collateral – home loans hold the property as collateral. If the market takes a downturn and you end up owing the bank more than the property is worth, then they don’t have sufficient collateral. I know that here in NZ, the bank can call the loan at any time and this is the situation when they might be inclined to do so. The more equity you have, the more resilient you are to market downturns.

  3. Rainiel De La Nuez

    I really like the approach and the analogy of planting a forest; It makes a lot of sense! I am wondering what you think about the current situation I find myself in today. I recently refinanced my home for a significantly lower interest rate that involved me taking a few steps back in order to go forward again. Long story short, I have the opportunity to pay a good chunk of money back to the loan to decrease the steps taken backwards. However, I also have the opportunity to hold on to that chunk of money and purchase an investment property in the near future. The fear is that in a few years my current home maybe me undervalued and I am left with a higher balance. Your article does give good insight on choosing a path that works for you based on ones goals. But I guess I am wondering what you would do.

    • Brad Lohnes

      Hi, Rainiel. Before saying anything, it’s important to note that I’m not a financial adviser. I’m a private investor, sharing the lessons that I’ve learned along the way both through extensive reading and personal experience. I can’t comment on anyone’s specific finances.

      Given that disclaimer, the correct answer is always: it depends. If you don’t have a lot of equity currently, then you could be exposed to a downturn in property prices. Also, if you’re struggling to cover the mortgage then it would be good to reduce the balance in order to reduce your payments. I personally wouldn’t go below 20% equity. But you could also check what kind of negative swing properties have taken in the past in your area – what kind of worst-case scenario are you trying to mitigate?

      Finally, the point of the article is the principle: if you don’t invest early and often then it’s pretty difficult to build wealth. A lot of people over-extend on their home mortgage which is why they then can’t afford to invest. If this is the situation, then downsizing is an option. 🙂

  4. Jason Trupe

    Great article, thanks for posting! I have recently found myself in this same dilemma. I currently have one investment property and would like to acquire more. For the past year we have been aggressively paying our mortgage down and have knocked several years off the term of the loan. If I were to instead invest that money I could acquire multiple properties in the time it would take to pay off the house. I guess my concern is having finance options limited due to having a mortgage payment.

    • Brad Lohnes

      Hi, Jason. Obviously it depends on your own situation. As I stated above, I’m not a financial adviser, just a private investor. As a general rule, it’s good to build equity in your home and use it to expand your investment portfolio. If you have too little equity, as others have pointed out, you can be exposed.

      But you raise a good point – at some point, having a home mortgage can make it harder to get lending for an investment property. Banks and other lenders might see you as “over-extended” due to the amount of debt that you’re carrying. They might be right. This is always tricky because if your investments are cash-flowing then each one can support itself stand-alone and you’re not nearly as extended as banks like to think. Nevertheless, if you’re in the situation where you can’t get lending, then it might be a good time to reverse the trend and focus on paying down debt on your home.

      At the end of the day, the ideal situation is NO personal debt, including the home. But the question is how to get there without missing out on 20+ years of investment growth.

  5. Peter Mckernan

    Hey Brad,

    Great job with this article! You have talked about two very possible options to build wealth that really excel an investors cashflow, either buy paying off a primary home, or buying multiple properties that cash flow. I believe, that if a person is not going to invest into any type of retirement while working to pay off their home, they should put 15%-20% of their pay away each month to put down on an investment. That investing aspect helps so much while living life because once retirement hits those investments would be throwing off a lot of cashflow with a paid for home!

    • Brad Lohnes

      Hi, Peter. I agree entirely. It’s hard to cover every angle in a single article, but the same principle applies for that extra money that people make available in their budget. If there are good deals to be had, then investing those dollars will be the more productive path long-term.

  6. Hey Brad,

    Thanks for the article. Are you saying you wouldn’t to go less than 20% equity even on a primary residence? I completely agree when it comes to income properties, but not necessarily primary residences where someone is looking to plant roots for a while. If monthly mortgage payments are still well affordable for someone only putting down 3.5% or 5% on a home they are planning to live in for a long time why not just put the minimum down? Especially at the interest rates we have today. Market dips should have no effect on that owner-occupant as their payment is fixed.

    • Brad Lohnes

      Hi, Patrick. It’s a tricky question. In my comments I was really coming from the point of view that you have built up some equity in your home, and you want to take some out to invest in rental properties. In this case, I wouldn’t want to go too low on equity. I’m not sure of the exact banking laws in the US, but I know that here banks can call in loans early even if you’re making the mortgage payments. They typically only do this if you have very low equity and property values are in decline.

      That said, we did go to 10% the first time, so I can’t say “never”. 🙂 But I personally wouldn’t want to go that low again. I feel like we were lucky that there wasn’t a downturn. (I mean, we “expected” that there wouldn’t be, but we were lucky that we were right.)

      On the flip side, I’d also personally prefer a higher deposit. But I know that people just want to get into property. I think that as long as the payments are really affordable then you’re right. But most people (not ALL people) really tend to push it when they are purchasing a home for themselves, typically getting the nicest home they can “afford”. This leaves things pretty tight.

      • I’m actually in a situation that is relevant to this article at the moment. My wife and I have been wanderers for a long time, trying out living in different areas as our jobs have allowed us to so we’ve kept an investment property in AZ while renting our own primary residence wherever we’ve gone. We now have a newborn and are ready to stay put in an area that has been a second home to us forever. Since we know this is where we want to be for the long haul and interest rates are so low I’m much more inclined to put down only 5% on a home for our family so we have more to contribute toward a 20%+ down payment on an investment property that is more vulnerable when it comes to market downturns.

  7. Rodney Marcantel

    Great article. Good read. No one strategy is best as everyone’s financial situation is usually different. Case in point is mine. I don’t have a full-time job. I’m a full-time real estate investor. I have funds to invest (1/4 of a million) and use that to fund down payment on rehab properties and cover the rehab costs and carrying costs. I use hard money to fund the rest (80% of home’s LTV). I also own 2 properties free and clear – my personal residence (brand new build 2016 and 3027 sq.ft.) and a rental property earning a net $1,300 monthly and valued at $250K. I tried to get a HELOC 2 years ago for investment purposes but didn’t show enough income to debt (debt being very low) to justify qualifying. So I converted a 403-B retirement account to a self-directed IRA and use that to invest. Advantage is all the money earned on a flip is tax free unless I take some out on occasion. But because our actual income is low, we are taxed very low and continue to build our IRA fund until we can begin removing the funds at retirement age (which is 13 years away).

    • Brad Lohnes

      Hi, Rodney. Thanks for your feedback. Glad you enjoyed the article. You’re exactly right that everybody’s situation is different. The value that I get from sites like this are the ideas and seeing how I can work those into my own strategy. In turn, I like to share ideas through my posts so that others can consider them for their own strategies. Good luck with your strategy!

  8. Michael Greenberg

    Hi Brad – great stuff here and I am personally struggling with this right now. One other consideration is the tax consequences/benefits of a mortgage vs. paying off your mortgage. I’m now studying this scenario as it corresponds to investment properties and my own home. Any thoughts as it correlates to Uncle Sam and how much does it weigh upon your decisions. Good thing he’s just our Uncle and not our Father 🙂 Thanks

    • Brad Lohnes

      Hi, Michael. I don’t currently live in the US so I don’t really want to comment on tax specifics. 🙂 For me, something needs to make sense outside of the tax benefits for me to go ahead with it. For example, I know that there is the tax deduction on home mortgage in the US (we don’t have this deduction in NZ). So, if it made more sense to pay off the mortgage then I’d do that, regardless of the tax benefit of not doing that. You are still paying interest to the bank, it’s just that the effect of this is a bit blunted by the tax break. That said, it’s obviously worth including in the numbers if you’re going to sit down and do the math. The math is important. I just wanted to present a non-math case for investing. I think that one thing people often don’t consider is that markets, including the property market, go in cycles, and usually (obviously not always) go up over time. But it happens in cycles rather than continuously. If you wait 20+ years to buy investment properties, you’re likely to miss out on a couple of cycles / upswings in the market which is a lot of wealth to pass up.

  9. Evan Thomas

    Great article! I like the tree/forest metaphor. It’s just like how I was taught arbitrage in school. I’ve been trying to convince my friend that if he can find an investment property that gives him a 5% return he should do that instead of paying off his 4.5% student loans quicker. Then he can pay off his student loans and still have 0.5% left over for whatever he wants (like another investment property). And that’s a measly 5% return. At 10% he could handle his student loan payments and possibly some of his rent/mortgage. I just sent him a link to this article. Thank you!

    • Brad Lohnes

      Hi, Evan. Glad you liked the article! I’m generally not a huge fan of “gaming the system” for a slight margin of interest. But in the case of property, as I mentioned in a comment above, it tends to swing upwards in cycles – maybe every decade or so (I’d have to look at the US market history to be more specific with US markets). Anyway, the point is, regardless of edges in interest rates, there’s the basic fact that if you don’t have any property you can’t benefit from the wealth gains that come from those market upswings. There are only a few in each person’s lifetime so waiting too long can be costly. Cheers!

    • Brad Lohnes

      Hi, Julie. Thanks for reading and glad you liked it! 🙂 Yes, real estate investing has a depth to it that keeps it very interesting. I found it was important to get an overview of what’s available first and then narrow my focus. Some things jump out at you. The issue of “what to do with my own living situation” doesn’t go away until you resolve it to your satisfaction. 🙂

Leave A Reply

Pair a profile with your post!

Create a Free Account


Log In Here