October 25, 2016

“You should refinance your property and invest the money!”

“You can pay it off and live with no debt!”

There are a lot of well-respected people on both sides of the argument, so who’s right?

Well, it depends.

Before I answer the question, let’s take a look at both sides of the argument.

Should I pay off my mortgage or invest?

It really boils down to two logical arguments.Should I pay off my mortgage or invest the money? One side says you should invest your savings instead of paying off your loan and the other side says you should minimize your expenses and live debt free.

In order to know who is right, we need to take a deeper look into each strategy and understand the thought process.

Paying off the mortgage

Let’s start with the crowd that suggest you should pay off all your debt, including your mortgage.

If you have a lot of debt, then you are one accident or mistake away from financial ruin.

Think about it – if you have an expensive mortgage and then lose your job, you may also lose your house.

Problem is, you still need a place to live.

By paying off the debt, you reduce the risk of losing your home should something terrible happen.

Financial Independence is easier when you have no debts

Most people work their whole lives in order to pay the debts they have. Those debts include cars, a house, credit cards, etc. If you are free from these burdens, then you don’t need to work as much.

Let’s just take a quick example of a person who has all those nice things and is paying $3,000 per month just to cover those debts. They still need to pay for health insurance, food, etc on top of all those debts, perhaps another $1-2,000.

To be financially independent, this person would need a passive income of $4,000-$5,000 per month.

A person with no debts only needs to pay those living expenses. In order to be financially independent, they only need a couple thousand per month in passive income. Not quite as difficult a task.

So by paying down the debt, you may have an easier time to achieve financial independence.

Investing the money instead of paying down the loan

A mortgage is very cheap money. Right now people can find loans with an interest rate under 4%.

The thought process is to take the money at a 4% interest, then invest it in stocks or real estate and return more than that.

It sounds like a good idea, right? Borrow at 4% and invest at 7% and you are earning 3% on that money.

Comparison: pay off the mortgage vs investing

First, let’s take a look at the potential interest you are losing by paying off by paying cash for a home. For simplicity, let’s say the choice is between having $100,000 to pay for a house, or having a 30-year mortgage at 4% and investing the $100,000.

If you could get 8% in the stock market, you would turn $100,000 into $1,006,265 in 30 years.

You have to pay off that mortgage as well – a 30-year mortgage at 4% would cost you a total of $171,869.

So your total return is $834,396. Pretty good!

Option 2: use the interest to pay the loan

8% interest on $100,000 is $8k per year or about $666/month.

The loan on that mortgage is only $477/month.

So in theory, you could withdraw enough money each month to pay the loan and still save an extra $190/month.

After 30 years you would have roughly $371,000 saved. You save a lot less because you aren’t reinvesting that interest.

What about cash flow?

Clearly borrowing money and investing it at a higher rate is what makes sense for maximizing your net-worth.

But the argument against it isn’t about net-worth. It’s about financial independence.

And FI is about cash-flow.

So it’s important to note that your mortgage requires principal and interest payments. The investment get’s all the money reinvested back into it, meaning the cash-flow from it is 0.

A $100,000 mortgage will cost roughly $477/month that you have to pay for the next 30 years.

With option 2 above, what happens during years that the stock market doesn’t return enough to cover the expenses? Do you draw down the account regardless, or do you pay it out of your own pocket?

if you pay off your mortgage depends on your goals.

Your choice depends on your goals

Before anyone even started reading this article, we already knew that on paper it’s better to borrow the money and invest it.

But, on paper you always earn 7 or 8%, you always make great investment decisions, and you never dip into your savings to do something silly like buy a car or go on vacation.

On paper, we also never die or get sick. Our notes never come due, and our children can inherit our properties without having to deal with bank loans, burial expenses, and death taxes.

Goal – to grow

If your goal is to grow your business, then it makes sense to leverage your property and invest the money.

Instead of investing the money in stocks, just invest it into more real estate. In theory, it’s pretty safe too.

The money from property 1 is invested and secured by property 2.

It can be risky, though. If you have a cash-flow issue, both properties would be at risk. Then again, if you have cash-flow problems, everything is at risk.

Goal – to retire

If your goal is to retire, you may be in a position to simplify your investments and maximize your cash flow.

Paying off loans does exactly that.

You won’t be growing your business anymore, but by paying off that loan, your cash flow jumps by that $477. You have less risk and higher cash-flow. That’s a win-win for a retiree.

Goal – to become financially independent

This is a tough one.

Some people can achieve financial independence by buying more property, or by paying down the property you already own.

Your $3,000/month in passive income might jump to $5,000 if you pay off all the debts. On the other hand, you could take that money and buy a few more property to reach your goal.

If your goal is to become FI, then I’d see which path gets you there faster. If it will take 5 years to pay off all the loans, but you can buy more and become independent in 3 years, then definitely go that route.

If you have the cash to pay down debt and reach FI, then I’d pay everything down and have low-risk financial independence.

About the author 

Eric Bowlin

Eric is an investor that achieved financial independence at the age of 30. He started in 2009 with the purchase of his first triplex and now owns over 470 rental units. He spends his time with his family, growing his businesses, diversifying his income, and teaching others how to achieve financial independence through real estate. Eric has been seen on Forbes, Trulia, WiseBread, TheStreet, Yahoo Finance and other financial publications. You can contact Eric by emailing him at [email protected] or with this contact form

  • Awesome analysis. It definitely depends on your goals.

    I think about it as a growth stage (where I currently am) and a pay down debt stage. Don’t do both at once because if you are going to grow your portfolio, it is better to move those purchases earlier by taking advantage of leverage.

    I also feel people don’t usually approach the debt pay down stage the right way. Don’t pay an extra $X per month towards your mortgage. If you end up with 70% of the mortgage paid for, but lose your job, guess what, you are still going to lose the house. It would be better to put those extra payments into a separate account that you can access later to continue paying the minimum if you lose your job.

    • That’s a really great point! Even if you only owe a few payments, the bank can still take your property if you miss payments.

      I look at it as stages as well. Your strategy depends on your stage/goals.

  • At today’s rates I’d simply refinance to 15 years (APR around 3%)

    I view 30 year mortgages as merely renting from the bank, i.e. if you can’t afford the monthly payment on a 15 year, then understand you’ll be renting, with little chance you’ll ever gain significant equity.

  • It really also depends on what kind of a spender you are. Of course, investing might give better returns but for that, you need to invest. If you the extra $100 a month you have goes towards the mortgage, at least it’s locked there. It’s better than spending it! If you are more diligent, then yes, you have the option of investing that extra $100…

    • Very true. Saving it in the house is better than spending it on something useless.

      Unfortunately, people just turn around and get equity loans to tap into that equity.

      Bad spenders will always find a way to waste their money, no matter where it’s stored!

      • Eric,

        That’s a good point about folks that tap into equity and essentially end up wasting it. I think that with the right mindset you could pay off a house, tap into that equity with a HELOC, and us the HELOC to purchase more cash-flowing property (and growing at the same time). Use your new larger cash flow amount to pay off the HELOC and rinse/repeat paying off one property after the next.

        It’s a method, and like all strategies it depends on your personal risk tolerance and financial position & goals.

        Good article!


  • The way I see it, as long as I can manage the cashflow it makes sense for me to just keep buying more properties and possibly never pay back the principal.


    It hit home for me when I was renovating a house. I found some old newspaper clippings from the 1920’s underneath the scabby old flooring. There were houses for sale in there for just £300! (pounds were used in Australia at this time).
    The same house today would sell for $300,000 dollars.

    This showed me that given enough time, property values go up considerably.

    Hypothetically if I was back in 1920 I could spend a few years building up a portfolio of ten £300 houses. Hold onto them long enough and each would be worth around $300,000 today, or $3,000,000 in total.

    Alternatively I could have spent the years paying down the loan on a single £300 house. Today it would be worth $300,000 total.

    To me, the difference is staggering and an obvious choice. If the first option is chosen, then at the end of the process, just a single one of the houses could be sold to pay off the outstanding loans on the others.

    I realise this example exists in a vaccum, but even if the figures were halved for realities sake, it still makes sense to do it this way.

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