Got a Cheap Mortgage? Don't Rush to Pay It Off — Invest Instead.
Mortgage overpayments or invest? Lets do the math.
The 'don't blame me' blurb: I am not a financial advisor, portfolio manager, or accountant. This is not tax or investment advice; it's information to get you going. Please consult your trusty professional and do your due diligence. Carry-on!
TL;DR
If your mortgage rate is under 5%, consider skipping overpayments.
Invest the extra money instead in a target-date fund or Three-Fund Portfolio to earn 7-8% over the long term.
Using a Backdoor Roth IRA or pre-tax Solo 401(k) gets you additional tax benefits.
Investing is the ultimate freelancer’s side hustle.
You just want to get that house paid off. I get it. There's a powerful urge among us to be debt-free. I mean, that’s what hard-working people do, right? It’s probably what your parents did.
But, if your mortgage — the loan on your home — has an interest rate under 5%, paying it off early could mean missing out on a lot of future wealth.
The whole idea in one sentence
Let’s say your mortgage rate is 4% while your portfolio in the stock market, using a set-and-forget Target Date Fund or a Three-Fund Portfolio, is making 7-8% over the long term. You get to keep the difference.
That gap — the spread — is free money you're walking away from every time you send the bank an extra payment instead of investing it.
Let's do the actual numbers
Say you've got an extra $500 a month. You're trying to decide: hammer the mortgage, or invest it?
Option A — Throw it at a 4% mortgage. You're effectively "earning" a guaranteed 4% by avoiding that interest. Over 20 years, that move is worth roughly $183,000. Not nothing.
Option B — Invest it and assume a conservative 7% return. Same $500 a month, same 20 years, in a boring portfolio that just sits there compounding. That comes out to roughly $260,000.
That's about $77,000 more in your pocket for doing the exact same thing — just pointing the money somewhere smarter. And the longer the time frame, the more ridiculous the gap gets, because that's how compound interest works. It starts slow and then goes a little crazy.
Future You is liking Option B.
Pay Down the Mortgage, or Invest It?
20 years of additional payments
| Monthly amount |
Total you put in |
Paying down a 4% mortgage |
Investing at 7% |
You come out ahead by |
|---|---|---|---|---|
| $200/mo | $48,000 | ~$73,400 | ~$104,200 | +~$30,800 |
| $500/mo | $120,000 | ~$183,400 | ~$260,500 | +~$77,100 |
Assumes a 4% mortgage rate and a conservative 7% average annual portfolio return, compounded monthly over 20 years. The 4% column is a guaranteed return; the 7% is a long-term expected average. We will get rich, slow.
"But the mortgage is guaranteed, and the market isn't."
True, paying down the mortgage is a sure thing. The 7%-8% return on a stock market portfolio is an expected historic average — some years the market is up 20%, some years it's down, and it does not care about your feelings.
Unless we have a shocking 20-year period, historically you’ll get 7-8%. But you need to hold fast during market downturns, don’t panic, don’t sell. What makes a good investor is their temperament, not the ability to pick the next Amazon.
That means keeping a cool head, even if you feel like puking in your mouth a little when the market is tanking.
Okay, I'm in. Where does the money actually go?
You've got three good homes for that extra money, depending on your situation:
A taxable brokerage account. The flexible one. No contribution limits, no rules about when you can touch it. When you eventually sell, you'll likely pay just 15% capital gains tax instead of your regular income tax rate. Totally liquid — pull it out whenever (but try not to as compound interest is your friend).
A Backdoor Roth IRA. Here's the underrated part:
The contributions you put in can be pulled back out in an emergency without taxes or the 10% penalty. So it doubles as a backup emergency stash that's also growing tax-free.
Gains from the Roth IRA are completely tax-free. You can begin withdrawing money in retirement at 59 1/2.
Read about the Backdoor Roth IRA here.
A pre-tax Solo 401(k). If you've got 1099 income, this is the tax-deduction monster. Every dollar you contribute comes straight off your taxable income, so Uncle Sam essentially chips in to fund your investment. The catch is it's locked up until age 59½, so this is your "I'm not touching it" money — the opposite of the Roth's flexibility.
Different tools for different jobs. Want max flexibility? Brokerage. Want a tax-free pot that's also emergency-accessible? Backdoor Roth. Want to crush this year's tax bill? Solo 401(k).
What investments do I use?
Go for the classics, inside a retirement account (the Roth or Solo 401(k)) use a target date fund, or a three-fund portfolio.
In a taxable account, skip the target-date fund, as it can trigger capital gains events, and use a Three-Fund Portfolio.
Don’t try to stock pick the next Amazon; it never works in the long run. 88% of active fund managers do WORSE than the S&P 500 index after 15 years. See the ongoing S&P SPIVA study scoreboard here. If the alleged ‘smart money’ can’t do it, how can you?
Ready? Hold your horses for a second, and read this:
Before you do any of this, two boxes need a checkmark:
High-interest debt is gone. Credit cards and anything over 7–8%, like student loans, kill them first. Always measure debt against what your portfolio earns. A 22% credit card beats your 7% portfolio every day of the week, so that gets paid off, period. Credit card debt is evil; drive a stake through its heart as soon as you can and never go back.
Your emergency fund is funded. Six months+ of expenses, sitting safe and boring, before a dollar goes into the market. Read about where to stash your emergency fund cash.
If both of those are handled, and your mortgage is sitting under 5%? Then sending the bank extra money instead of investing it is, mathematically, leaving a pile of cash on the table.
A final thought
Something a good friend of mine, who is a professional real estate and startup investor, said to me a while back really turned on a light bulb. “Are you going to live in that house forever?” he asked. My answer was no.
“Ok, so right now your house is just an asset you are living in.”
Your current home is not a precious, sacred item. Pay your mortgage on schedule. Invest the rest if the math adds up. Let the two of them race for 20 years and see who wins.
Future You will thank Now You.
