Should You Pay Off Your Mortgage Early?

Should You Pay Off Your Mortgage Early?

Clients often ask us: “Should I pay off my mortgage early, or put that money to work in the market?” It’s a great question, and the answer depends on several personal and financial factors.

This common question becomes easier to answer when mortgage rates are more extreme to the upside or downside. But at current levels (around 6.5% for a 30-year), it can be a bit more complicated. And yields on cash and savings accounts are way better than, well, basically ZERO, as they were for years.

U.S Weekly average mortgage rates as of 08/14/2025

Over the past decade or so, many homeowners locked in historically low mortgage rates—often below 3%,thanks to favorable lending conditions during and after the financial crisis and the pandemic. At the time, these low rates felt like a win, especially compared to the much higher rates seen in previous decades. But for those with a bunch of cash just sitting in low-yield accounts, the decision to keep a mortgage didn’t always make financial sense.

When the return on cash or other "safe investments" was significantly lower than the "mortgage rate", paying off the loan early could offer a better net return. In that kind of environment, the numbers often favored using excess cash to reduce or eliminate mortgage debt, especially as payments shifted increasingly toward principal later in the loan term.

Of course, if your backup plan involved investing in stocks, it might have made more sense to keep your mortgage loan while aiming to achieve higher returns in the market.

Fast forward to today: inflation spiked, and the Federal Reserve raised rates 11 times. That’s changed the equation. If you locked in a low mortgage rate years ago, investing might give you a better return. But if you’ve got a newer mortgage with a much higher rate, early payoff can still be a smart financial play.

So, how do you decide? Here are some key questions we walk through with clients.

Do You Need Access to Your Cash?

Liquidity matters. If you might need that money in the near future, tying it up in your home isn’t ideal. Sure, you can access home equity through a HELOC, but that’s not as flexible or immediate as pulling funds from a brokerage account.

What’s the Better Return—Paying Off or Investing?

Your mortgage rate represents the "guaranteed return" you receive if you pay it off early. For example, if your rate is 3%, you have a locked-in return of 3%. However, depending on your individual situation, paying off a 3% mortgage might not be the best option, as you are likely to achieve a higher return through other investment alternatives.

Let’s look at the broader picture: Most people today have mortgages with rates below 5%. In fact, as of mid-2023, Realtor.com reported that over 75% of mortgages were below 5%, and 21% were under 3%. Meanwhile, new mortgages are around 7%.

If your current mortgage has a higher interest rate and is fairly new, your investments will need to perform well to surpass that rate. Conversely, with the current bond yields, many fixed income investors are projecting returns of 4-5% over the next ten years. And while cash yields are lower and generally less reliable in the long term, they are still considerably better than they were a few years ago.

And if you have a low-rate mortgage, investing your money could provide more potential for growth.

Where Are You in Life?

Your life stage and time horizon matter. Younger clients with decades until retirement tend to benefit more from long-term investing, particularly in stocks. Markets fluctuate, but historically, they’ve outperformed mortgage rates over the long haul.

If you’re closer to retirement, the conversation shifts. Your portfolio might be more conservative, your returns more modest. Plus, reducing fixed expenses like a monthly mortgage payment can make a big difference in retirement planning.

How Do Taxes Factor In?

"Mortgage interest" used to offer a more meaningful tax break. But since 2018, the standard deduction has increased, and fewer people itemize. There’s also a $750,000 cap on interest deductibility for new loans.

The result? Over 90% of taxpayers now take the standard deduction, so most don’t get a tax break for mortgage interest anymore.

Meanwhile, investing through a 401(k) or IRA can deliver tax advantages. Not paying off your mortgage could free up cash to contribute more to those accounts giving you a tax deduction now and deferring taxes on growth until later. That can effectively boost your investment returns, especially in higher tax brackets.

Just be cautious if you’re considering pulling from retirement accounts or selling appreciated assets to pay off your mortgage there may be tax consequences. In those cases, a conversation with a financial advisor is essential.

What Other Costs Are You Carrying?

Don’t overlook extras like private mortgage insurance (PMI), which applies if your equity is below 20%. If you’re paying PMI, it’s a strong argument for paying down your loan faster. Sometimes, a new appraisal showing increased home value can help you drop PMI without making large payments.

Is There a Prepayment Penalty?

These are less common now, but they still exist. Check your loan documents or call your lender to see if paying off your mortgage early triggers a fee. Even if there’s a penalty, it might still be worth it depending on the broader financial picture.

How Much Do You Value Peace of Mind?

At the end of the day, the decision isn’t purely mathematical. If your expected investment return is close to your mortgage rate say, both around 5% your personal comfort level plays a big role.

Some people feel an incredible sense of freedom being debt-free, relishing the peace of mind that comes from eliminating financial obligations. Others, however, find more comfort in maintaining liquidity and allowing their investments to grow, even if it means carrying some debt.

One hypothetical client in her 60s, between jobs but holding a strong cash reserve, chose not to pay off her 5% mortgage. She preferred to keep her funds in the market and preserve flexibility a decision that aligned with her long-term financial goals.

Another example involves a couple in their early 40s, both entrepreneurs, who deliberately kept a low-interest home loan while using surplus cash to scale their business, which ultimately outpaced the interest costs.

Meanwhile, a retiree in his 70s might opt to pay off his mortgage entirely after a market downturn left him wary of volatility, prioritizing peace of mind over potential investment returns. These hypothetical scenarios illustrate that the “right” financial move varies widely based on personal circumstances, risk tolerance, and life stage.

Bottom Line

There’s no one-size-fits-all answer. The best decision depends on your mortgage rate, your investment options, your life stage, your tax situation, and how you personally define financial security.

If you’re wrestling with this question, let’s talk. We’ll crunch the numbers and make sure the decision you make aligns with your financial goals, risk tolerance, and peace of mind.

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Concerns or questions about your financial plan or tax strategy? Contact Financial Plan Provider LLC today.

We are a boutique, financial advisory and total wealth management firm with over 15 years helping clients navigate turbulent markets. To learn more about our approach to investment management, please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.

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