Pay Down Mortgage or Invest if You're Young, 40's or Older

If you’re asking yourself this question then you’re in a good spot. Having extra money to pay down your mortgage or invest is a great place to be.

I think the best thing to do in this case depends on where you are. If you’re young and have a stable job, invest in index equity funds. If you’re in your 40’s and have a decent investment balance then split the money half to each. If you’re older it will be very situational dependent.

Why should you invest instead of paying down the mortgage when you’re young?

Compounding returns! You have the grand opportunity of a long runway which will allow you to invest the majority of your money in low cost index funds. If you start early you can invest less and have more at retirement thanks to the time value of money.

Investment returns will likely outpace mortgage rates. Mortgage rates are amazingly low right now and while everyone is saying the market is overvalued (we’re in the second longest bull markets ever) equity returns over the next 20-30 years have a very high probability of being higher than your mortgage rate.

It’s forced savings. If you paid off your entire mortgage then you’d feel great, but what are the odds that you’d then invest what was previously the entire mortgage payment? I know I’d think I could, but likely wouldn’t.

Why should you split your mortgage prepayment and investing if you’re in your 40’s?

You have all the benefit of the above, but as you get older you have less time to recover from market crashes. And you should pay off your mortgage before you retire. So splitting the money will allow you to speed up your investing and mortgage prepayment, but lead to less regret if the market dips.

They key is not really which you do. The real impact is how much you put against your mortgage or invest. Savings rate is more important than which you're throwing your money at.