Impact of Paying Mortgage- Impact of Investing
- Earnings Vs. Savings
- What the Experts Say
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- The Bottom Line
Should I Invest or Pay off My Mortgage?
Comparing the loan interest saved versus investment gains
By
Updated February 20, 2025
Reviewed by Caitlin Clarke
Fact checked by
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The best option for a windfall of cash might be to invest it if a realistic rate of return significantly outpaces the interest being paid on the mortgage. However, there are other factors to consider. The pros and cons of paying off a mortgage early depend on the borrower’s financial circumstances, the loan’s interest rate, and how close the individual is to retirement.
Consider the interest cost that could be saved by paying off a mortgage 10 years early compared to various investment returns earned by investing the money in the market.
Key Takeaways
- Whether paying off the mortgage early is a good choice can depend on your financial situation, the loan’s interest rate, and how close you are to retirement.
- Paying off a mortgage has its benefits, but consider other factors such as the tax deductibility of mortgage interest and low loan rates.
- Investing the money instead may generate higher returns than the loan’s interest cost, but markets also come with the risk of losses.
How Paying off a Home Affects Your Finances
Mortgage payments are made up of two components: interest on the loan and a principal amount that pays down the total outstanding balance. A $1,500 monthly payment might pay $500 toward interest. The other $1,000 will reduce the principal loan balance. Interest rates on a mortgage loan can vary depending on the economy and the borrower’s creditworthiness.
A loan payment schedule over a 30-year period is referred to as an amortization schedule. The payments for a fixed-rate mortgage loan mostly go toward interest in the early years. A larger portion of the loan payment is applied toward reducing the principal in later years.
Assume that you have a 30-year mortgage with a starting balance of $200,000 and a fixed interest rate of 3.50%. It would work out like this.
| Components of a Mortgage | ||||
|---|---|---|---|---|
| Payment Number | Monthly Payment | Principal | Interest | Loan Balance Remaining |
| 1 | $898.09 | $314.76 | $583.33 | $199,685.24 |
| 109 (10 years) | $898.09 | $431.10 | $499.99 | $159,679.65 |
| 229 (20 years) | $898.09 | $611.45 | $286.64 | $97,665.59 |
| 301 (25 years) | $898.09 | $754.10 | $143.99 | $48,613.86 |
| 360 (last payment) | $898.09 | $895.48 | $2.61 | 0.00 |
Sample Loan Payment Schedule with Interest and Principal
A larger portion of the fixed monthly payment goes toward paying interest during the first 10 years, but the percentage of the monthly payment that goes toward interest versus principal reverses as time goes on. More than $611 went toward principal while $286.64 went toward interest after 20 years. All but $2.61 of the last monthly payment went toward paying the principal balance.
The portion of the mortgage loan payment that’s applied to principal and interest changes over the years because the loan balance is higher in the early years and smaller in the later years. You’re paying interest on more of a balance in the early years. Less interest is owed as the monthly payments eventually reduce the outstanding loan.
How Much Interest Will You Save?
Some homeowners choose to pay off their mortgages early, and the benefits can vary depending on your financial circumstances. Retirees might want to reduce or eliminate their mortgage debts because they’re no longer earning employment income.
Let’s assume that a borrower has received an inheritance of $120,000. There are 10 years left on their mortgage. The original mortgage was $200,000 at a fixed interest rate over 30 years. This table shows what it would cost to pay off the loan 10 years early and how much interest would be saved based on three loan rates: 3.50%, 4.50%, or 5.50%.
| Cost to Payoff Mortgage 10 Years Early and Interest Saved | |||
|---|---|---|---|
| 10-Year Balance Remaining | Interest Rate | Total Interest Cost for 30 Years | Interest Saved |
| $97,665 | 3.50% | $123,312 | $20,270 |
| $104,735 | 4.50% | $164,813 | $28,411 |
| $111,657 | 5.50% | $208,808 | $37,618 |
Balance Remaining in 10 Years at Various Interest Rates ($200K Starting Balance)
The higher the interest rate, the larger the amount remaining on the loan will be with 10 years left on the mortgage.
Save Interest by Paying Off the Loan
The total interest cost for the 30-year loan would be $123,312 at the 3.50% interest rate. The borrower would save $20,270 by paying it off 10 years early.
Saving more than $20,000 in interest is significant, but the interest amount saved represents only 17% of the total interest cost for a 30-year loan: $103,042 in interest has already been paid in the loan’s first 20 years ($123,312 – $20,270), which accounts for 83% of the total interest over the life of the loan.
How Investing Affects Your Finances
It might be worth considering whether some or all of your money might be better off invested in the financial markets. The rate of return earned from investing might exceed the interest you’d p