Pay Off Mortgage or Invest? (With Calculator!)

Now that my wife and I are officially done with consumer debt, one conversation we've had again and again is where we should put the extra money every month.  We still have a mortgage, and one of our FI requirements is to have that paid off.  Another requirement is that we have an investment balance of $800,000.  So, which should we focus on first?

The good news is that either option puts us closer to our overall goal.  That means either answer is a good one, and I'll get into the considerations here.

First, which option gets us to FI faster?  I made a calculator spreadsheet to help with this discussion.

The above link should prompt you to make your own copy on Google Sheets to play with. If not, go to File > Make a Copy.

Our current mortgage balance is about $100,000, and it's a 15-year mortgage we refinanced in early 2020.  The interest rate is 3.25%.  We have approximately $4,000 extra to invest every month, and around $240,000 already invested (nearly all of which is in my 401k and my wife’s IRA).

In scenario 1, we'd pay off the mortgage as fast as we can.  That looks as follows:

In scenario 2, we'd focus on investing first, and then pay off the mortgage right before our FI date.  That looks as follows:

Unsurprisingly, putting the money in an investment that averages 7% grows our money faster than paying off a 3.25% mortgage.  But what IS surprising is that there's only about 9 months' difference between these two scenarios.

In that case, are there any other considerations?  One factor the bare math above doesn't show is risk.  On average, the stock market averages 7%...but that can vary dramatically from that figure.  Paying off the 3.25% mortgage nets us an equivalent return of…3.25%, guaranteed.  This is why paying off our student loans at a confirmed 6.5% is a no-brainer when compared to a potential 7% investment return.

What about other considerations?  Well, for tax efficiency purposes, I'd like to always max out my 401k and my wife's IRA.  If we did that and put the rest of the money towards the mortgage, it's pretty close to splitting our extra monthly money between the mortgage and investments. I'll call that scenario 3:

That's looking like a promising middle of the road option.  However, another factor I'd like to consider is incremental freedom.  If we choose to pay off the mortgage aggressively, it only buys us freedom once the mortgage is completely paid off.  As an example, if I were to lose my job in the meantime, the regular mortgage payment is still due every month.  If we choose to invest instead, the money is simply in a taxable brokerage account which is available anytime (at least the money above what is sent to the 401k and IRA).  So in the same scenario of job loss, that chunk of money can function as a large emergency fund.

Which option did we ultimately choose?  Well, for now we are going to focus on investments primarily to gain the additional peace of mind described in the previous paragraph.  However, we may choose to switch to paying off the mortgage aggressively once the taxable investment account balance comes to a year of expenses. That will buy us incremental freedom as well as have our mortgage paid off quickly.