So you've got a mortgage and you've got some extra cash flow coming in each month. If you want to get rid of that mortgage payment, the obvious thing to do is to make extra payments on your mortgage.

But there's another strategy to consider that could actually pay off your mortgage even faster and give you more peace of mind in the meantime. That's what we're tackling in today's video.

Example of Making Extra Mortgage Payments

Let's look at an example of a $300,000 mortgage, 30 year fixed rate at 4%. The monthly payment on that mortgage is $1,432 per month. And assume we’re making an additional $500 per month payment on that mortgage. Instead of 360 monthly payments, with that $500 extra payment, we're going to actually pay off that mortgage in 220 monthly payments.

So we're going to pay that mortgage off more than 10 years faster by making those extra payments.

In that example, if we pay an extra $500 per month on the mortgage, we're going to pay off the mortgage in 220 payments, which is 140 payments less than if we just made the minimum payments on the mortgage.

What If You Invested the Extra Cash Flow?

But another thing we could do with that extra $500 per month is we could invest it.

And once our investment balance minus the taxes that we're going to owe on our investment gains is greater than our outstanding mortgage balance, then we can sell our investments and pay off the mortgage.

So let's look at an example of that with the same details as before ($300,000, 30-year fixed rate at 4%). But instead of making $500 of extra monthly payments on the mortgage, we're going to invest that extra $500 per month of cash flow.

And we're going to assume that we earn 8% on our investments. That's roughly the long-term average of US large cap stocks. So again, we're just going to use that as an assumption. Of course that return could be different in the future, but that's what we're going to use in this example. And then we're going to also have to pay taxes on our investment gains. And so we're going to assume a tax rate of 15%.

Now, after 194 months our investment balance after paying taxes is going to be more than our outstanding mortgage balance which means then we can sell our investments and then use those proceeds to pay off the mortgage.

So by investing the extra $500 per month and earning 8% per year on our investments, we were able to pay off the mortgage in only 194 payments compared to the 220 that were required by making the extra mortgage payments.

When Is Investing Better Than Extra Payments?

The reason that this worked in the example is that our investment return of 8% minus taxes was more than our mortgage rate of 4%.

The catch, if you want to call it that, is that that 8% investment return is not guaranteed. Far from it.

You could earn more than 8% on your investments. You could earn less than 8%. You could even lose money on your investments.

And so you want to factor that risk into your decision.

If my investment return minus taxes had been less than my 4% mortgage rate, then I would have been better off making the extra mortgage payment.

I think the invest or pay off your mortgage debate often gets pitched as you can only do one or the other.

The point that I'm trying to make is at the end of the day, if you just don't want to have a mortgage payment, you might be able to do that faster by investing.

Does Being Mortgage-Free Really Provide More Peace of Mind?

I want to touch on another big advantage of investing versus making extra mortgage payments.

One thing people often say in defense of making extra mortgage payments is that being mortgage free creates this freedom and flexibility and peace of mind.

If I lose my job, or if I want to take some time off, then I don't have to worry about a mortgage payment.

And there is definitely value in that, once the mortgage is paid off.

But in the meantime, making those extra payments may actually create the problem that you're trying to avoid.

Let's say you're a few years in to making those extra payments, and you get laid off from your job.

Well, your mortgage balance is a lot lower, but it's not paid off.

So your mortgage payment hasn't changed, but now you don't have an income.

If you had been investing those extra dollars instead, well now you'd have a big pile of cash there that you could use to make your mortgage payments and pay for your other living expenses while you look for a new job.

So I think this is another reason why investing the extra cash flow can be beneficial, even if the ultimate goal is to pay off the mortgage.

I hope this video was helpful and gave you a new perspective on the invest versus pay off your mortgage debate. Obviously I'm presenting one side here. There can definitely be cases where it makes sense to make extra mortgage payments.

Everybody's situation is unique, and so if you're curious about your specific situation, I'd recommend scheduling a free consultation to review your specific circumstances.