Should I stop investing in U.S. stocks and pay off my mortgage as soon as possible? The calculations are as follows

If you have some extra money each month, you may be wondering whether it's better to invest that money or use it to pay off your mortgage faster, especially if mortgage rates are rising and you have a new or variable rate mortgage.

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Remember, experts recommend that you build up an emergency fund of three to six months' worth of expenses before you use the money to pay off debt or invest. Once you have this fund in place, you can start thinking about the best use of your money.

In order to make an informed decision, you need to calculate the opportunity cost. This is the potential return or savings you will give up.

If you have locked in a low interest rate on your mortgage and have a balanced, diversified portfolio, it may make sense to invest your extra cash. However, if the interest rate on your mortgage is higher than the return on your investments, then you may want to focus on your mortgage first.

But it's not that simple. There are other factors to consider, such as your life span and risk tolerance, whether you'll need cash in the near future (paying off your mortgage early means less liquidity), and whether getting out of debt faster will be psychologically rewarding (after all, some people sleep better without 30 years of debt weighing them down).

There is no "right" answer, as the decision depends on your own unique situation.

Comparative earnings

Crunching the numbers can help you make an informed decision. Let's say you have a $250,000 30-year fixed rate mortgage. As of April 4, Freddie Mac's average U.S. interest rate for a 30-year fixed rate mortgage is 6.82%. Using the Mortgage Calculator, we can see that your monthly payment will be $1,633.14, and you will pay a total of $337,932 in interest.

If you had an extra $500 a month, should you invest it or use it to pay off your mortgage faster?

If you pay $500 more per month on your mortgage, you will shorten the time it takes to pay off your mortgage by 13 years and 10 months. This is a savings of $175,082 in interest.

From 1957 through the end of 2023, the average annualized rate of return for the S&P 500 was 10.26%. Assuming this rate of return, if you invested $500 at the beginning of each month for 16 years (which, for comparison's sake, is roughly the amount of time it would take to pay off the mortgage in the example above), you would end up with $222,962.61.

Based on these assumptions, investing in finance would give you a return of about $47,000 compared to paying off your mortgage faster. Granted, your portfolio may not be as aggressive or your mortgage rate may be higher, so it's worth doing the math yourself (there are plenty of online calculators that can do it for you).

Past performance is no guarantee of future results.

When comparing your options, keep in mind that the stock market is unpredictable and volatile, and there is no guarantee that you will achieve average historical returns.

Comparing the purchase of assets with guaranteed returns, such as U.S. Treasuries, to the early repayment of a mortgage, massively safer.

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If you're investing for a longer period of time, you have a higher risk tolerance. For example, if you're only in your 20s, you may want to put your money in a 401(k) account so you can benefit from compounding interest and still pay off your debts. In a downturn, you still have time to wait for the market to recover, allowing your long-term return to exceed your mortgage rate. If you are approaching retirement, you may be more inclined to take a conservative approach.

Other considerations

If you have an employer-sponsored retirement account and your employer matches your contributions, it may make sense to consider this option - it's like getting free money that can compound over time. Additionally, taking advantage of a tax-advantaged retirement account can result in some tax benefits.

By paying off your mortgage early, you can save a significant amount of money on interest payments while building up your home equity faster. This is important if you have been paying for private mortgage insurance until you have built up sufficient equity in your home.

Also, consider that you may be penalized for paying off your mortgage faster. Some lenders will charge you for early repayment of your mortgage when you could have invested the money elsewhere. It may be worth discussing with your financial advisor which option is best for you.

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This article is for informational purposes only and should not be construed as advice. No warranty of any kind is provided herein.