Should You Pay Off Your Mortgage or Invest? (Best Choice for FIRE)

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2:37Mindy Jensen:Right now, 80 % of homeowners have a mortgage rate of 6 % or less. What is the best option for fire? Paying off your mortgage or investing that money? It's one of the most debated questions in the FIRE community, and honestly, the math says one thing, but your gut might be telling you something completely different. Today, we're breaking down the real numbers, the psychological factors, and the scenarios where each choice makes sense. Whether you're sitting on extra cash right now or planning for the future, this episode will help you make the right decision for your situation. it.

3:15Mindy Jensen:Hello, hello, hello, and welcome to the BiggerPockets Money Podcast. My name is Mindy Jensen, and with me as always is my doesn't-have-a-primary-residence-mortgage co-host, Scott Trench. Thanks, Mindy. Great to be here. Good vibes today. And that's a reference to the vibe coding that we've been doing to build some really cool tools. So excited for today's episode. I love this topic. When I was researching for today's episode, I was pulling up some calculators to analyze, should I pay off the mortgage or should I invest? And I didn't like any of the calculators I found on the internet. I thought that they were terrible.

3:46Some of them didn't allow you to make long investing time horizons. Some had wild assumptions or problems with it, where if you paid off the mortgage early, like let's say we're saving$5 ,000 a month and you paid off your mortgage in year 10 or whatever it was, then it would just say that there was a wild difference in terms of the value of paying off your mortgage versus investing or vice versa, because they didn't account for taking the funds after that investing. It was crazy. Like, there's no good way to make this analysis. And so today I'm excited to talk about this and, you know, go over the philosophy and thoughts behind, you know, what is going to matter in the context of the decision.

4:19And then I want to talk about a wonderful, I think the best ever, maybe a new calculator to analyze this decision that I built and embedded on biggerpocketsmoney.com as a full stack or at least front end developer that I've turned myself into now.

4:33Mindy Jensen:Well, Scott, it's lovely that you have so much time on your hands. I really do appreciate that you said we when it was really just you. I am excited about this calculator because like you said, there aren't any really great calculators out there to help you make this financial decision based on the numbers. There's the emotional side of it, which we'll get into in a minute, but there's also like this numbers component. On the surface, it could seem like, oh, I've got a 6 % mortgage, I believe I can make 8 % to 10 % of the stock market. Clearly, I should invest that money instead. But it's not always so black and white.

5:10Mindy Jensen:So I'm excited to introduce your amazing calculator to our audience, which can be found at biggerpocketsmoney.com slash mortgage dash calculator. All right, Scott, let's get into it. Should you pay off your 6 % mortgage or invest it? And does it matter if that mortgage is lower? Well, I think that that's the question, right? And there's so many variables that go into this, right? So let's zoom out here. If you ignore taxes and ignore all the other noise there, you're going to have more wealth over a long period of time if you invest rather than pay off your mortgage, right? A study from the Journal of Financial Planning found that if you invested from 1963 to 2019 during those periods, you would have been much better off investing rather than paying off a 6 % mortgage.

5:55I think you'd have 50 % more wealth over any given period of time there. But that doesn't tell the whole story. And I think that in today's environment here in 2025, with stocks two to three standard deviations above their long-term ratios, the ratios of price to earnings, price to sales or whatever, I think that some people at least will want to be making the calculation or the assumptions that go forward, assumptions around returns a little differently. And I think the calculus changes. There's also tax considerations, right? A mortgage in today's world, in many cases, you're not going to be deducting the interest because most people are going to be taking the standard deduction, although there are certain nuances where you might be better off itemizing.

6:35And investment gains are taxed. So there's a tax spread here that can hide behind this surface analysis of investing versus paying off the mortgage being a better option for you. And I tried to capture all that in this calculator here.

6:47Mindy Jensen:I think that's what really sets your calculator apart from the other ones that we were able to find online is that you're taking into account the taxes that you're paying on those gains. It's real easy to say, oh, 3 % mortgage versus 10 % returns. Of course you invest. But those returns are taxed, like you said. You said something about the average includes people who stayed invested through multiple market crashes without panicking and selling. As you said that, I looked up what are the annual returns on the stock market, because historically, the average is 10%. If you got into the stock market in 2021, you saw 26.89 % S &P 500 returns that year.

7:31Mindy Jensen:But then, Scott, you remember 2022? 2022 finished out negative 19.44%. So if you were in the market in 2021, you are thinking you are the best investor ever, and then 2022 hits and you're like, oh my goodness, I have to sell because I can't handle this market and these downs. Well, 2023 was up 24.23%. And yes, much of that is just recapturing the 2022 losses. But then 2024 is up again, 23.31%. And I'm getting these from macrotrends.net. And if you look at this, this is an awesome, I'm actually gonna share my screen, Scott, because this is such an awesome page. Look at how frequently the stock market is up.

8:12Mindy Jensen:the green versus how frequently it's down, which is the red. The stock market goes up more than it goes down. But tell that to somebody who buys in 2007 and then look at 2008. Those are some huge numbers. So anyway, I just wanted to show that. We have to take a very quick ad break, but while we're away, head on over to YouTube and subscribe to our channel. That's youtube.com slash at Bigger Pockets Money.

8:41Welcome back. Should we get into it and talk about this calculator and going to go through what we think is the typical scenario for folks?

8:48Mindy Jensen:Scott, why don't you show us your beautiful calculator? I'm so excited. Let's start off with some assumptions here, right? So let's take somebody who's bought recently and they bought a big house, right? So we got a$750 ,000 mortgage. And I'm using a larger example specifically for context of the calculator here. We've got the 6.25 % interest rate, which is about what you'd get if you applied for a 30-year fixed rate mortgage as a home buyer today here on November 6th, 2025. We've got a 30-year loan term and we've got a extra payment. We're a bigger pockets money crowd. We're big savers. So we're going to be thinking about, hey, we're going to be making a$2 ,500 payment or$30 ,000.

9:27I could either invest that in the stock market perhaps, or I could pay down my mortgage. We're married filing jointly. And that's important because if we're going to take the standard deduction of $31 ,400 in 2026 next year, interest on this mortgage is going to be$46 ,000, right? Now, note that I'm using$750 ,000 as a mortgage amount in the base case for a reason. You cannot deduct mortgage interest beyond that which is paid in the first$750 ,000 in principle. So it's this rare case, relatively rare case of people who have a large mortgage balance and a fairly large interest rate that's going to put them over the standard deduction, right?

10:07That could be more common if you are single, for example, and are taking that standard deduction or merely filing separately or head of household. We have all those toggles in here. And then you have to assume what your investment is going to return, right? And a lot of people will just plug in here, I'm going to assume 10 % returns for the foreseeable future, right? And that's one option you have here. But I think a lot of people also are worried about stocks at all time highs, and that's starting to change the calculus for some of these investments. And so I wanted to put a field in here that said, you know what, I'm a little uncomfortable with the stock market.

10:34I think for the next 10 years, the return is going to be closer to 3 % in stocks, and then it's going to resume its normal 10 % ride, or maybe something a little more conservative, maybe a 7 % ride there. And this is a title that is going to be based on how you feel, what you believe. And of course, people are going to be screaming from the rooftops, it's timing the market. Sure, if you don't want to time the market, just assume the long-term averages for everything. That's your right from a calculation perspective. And then we also got to figure out that last, that there's going to be taxes on any gains from an investment portfolio, right?

11:05This is really complicated and I didn't build it out in a really complicated way, right? Because you can contribute to pre-tax retirement accounts. You can contribute to Roth IRAs. There's, you know, all these different variables that go in here. I just assume that all gains are going to be taxed at 20 % on investment returns as the base case, but you can toggle that any way you want, 15%, 10%, whatever you think is appropriate in your situation long term. But that's going to be an important variable here between paying off the mortgage versus investing. So how am I doing, Mindy, so far? You like all this?

11:34Mindy Jensen:I love all of this because you've got this investment assumptions column that really allows you to play around and see, well, what if this? What if this? What if this? Because I think the FIRE community is really into what if this? What if this? Let's see what happens here in this scenario, right? In this scenario with low assumptions for stocks in the near future, the paying off the mortgage assumption is a winner over the next 30 years here. I am surprised. Yeah, that's because we're assuming low returns in stocks, right? If we assumed higher returns here, if we put like a 7 % or 8 % return for stocks in the first 10 years the whole way, then we're going to have a higher net worth if we invest instead of paying off the mortgage, right?

12:16And, you know, so this begs your question, what do you think is going to happen here? Well, I think a good assumption is like 3%, 4 % for stocks over the next 10 years. I'm a little skeptical that the stock market's going to continue compounding at this 10 % rate now that we're at all-time high price to sales and CAPE ratios. You can laugh at me every year where I'm wrong on that, anybody listening here. But that's how I feel on this. And then I think that after about 10 years, it's going to settle and it's going to resume. It's compounding at a higher long-term rate, maybe like 8 % here. So that's what I would probably put in on this.

12:45And in this case, investing still wins under these scenarios here. But let's say you're a high income earner and you're a little bit wealthier on this front, right? So you're going to assume a little higher tax bracket, you know, 24.55 for long-term capital gains, which is state and Colorado tax rates. And let's say you're in a, what's the next marginal tax rate? Is that 32 %? The next marginal tax bracket?

13:06Mindy Jensen:Put me on the spot, Scott. Investing still wins. So. Okay. 24%, 32%. Yep. Okay. Perfect. So, you know, this is Colorado's 24.55 % would be the most aggressive long-term assumption for capital gains that you can get under today's tax code for Colorado, right? 4.55 % long-term capital gains tax rate plus the 20 % federal capital gains rate. The capital gains tax on investing will almost certainly be lower than this for everybody, including people in the highest income bracket, because the first parts of those gains can be a lower tax. This is the highest possible marginal tax bracket. So even in this scenario, we're going to see that investing wins.

13:50Mindy Jensen:Okay, one more, and then we can go on to talk about other things. But the initial return rate, do that at 5%. So go back to 750. I want to see if there's a way that it's like, hey, it's the same. Oh, investing wins. Now we're going to lower the interest rate dramatically, right? And in this case, it's going to compound the benefits of investing. But let's go into some nuances that people might not expect, right? Let's say you have this higher interest rate mortgage, but your balance is smaller. Let's say it's like a$350 ,000 mortgage, right? You're not getting interest that is above your standard deduction.

14:19One of the benefits, the things that skews the analysis in favor of investing rather than paying off a mortgage is for this portion of the investor community that has a high balance,$750 ,000 or more balance mortgage, where the interest is going to be more than the standard deduction that they're taking, right? Because now there's a tax advantage to keeping that mortgage balance in place and paying that interest, right? Mindy, let's go over a situation where I think it makes a lot of sense to pay off a mortgage early.

14:51Mindy Jensen:What is this context of this paying off the mortgage? What are our numbers? A high earning family, right? They're going to be in high marginal tax rate, tax bracket, let's say 24 % marginal tax bracket or 32 % marginal tax bracket. Their loan balance is$350 ,000 and they've got that high interest rate, that six and a quarter interest rate that's prevalent in today's world, right? They're also a little bit, they agree with me, they're a little bit more cautious about forward returns for stocks for the next five, 10 years, given sky high valuations. And so they're a little skittish about that. And that's impacting, that's going to sway their decision-making about whether they should pay off the mortgage or invest.

15:30And, you know, we'll go back to a more reasonable assumption for long-term capital gains tax rates of about 20 % blended. So in this case, now we're going to have paying off the mortgage being a winner here relative to investing, right? And I want to call out the same situation, the same six and a quarter interest rate mortgage. If the balance was higher at$750 ,000, it would be different. It would show the investing option winning. And it's because of that tax advantage, that ability to use the mortgage interest of about$46 ,000 in this case to file an itemized deduction, which produces a tax break.

16:10And that compounds pretty meaningfully in these first couple of years. So what's happening in this detailed breakdown here is in the first year, right, November 2025 and December 2025, we're only going to have two mortgage payments, right? And we're only going to rack up two months of interest. So we're not going to take our itemized deduction for mortgage interest in 2025. Instead, we're going to take that itemized deduction in 2026, and we're going to take that for the next, I don't know, like 15 years on this particular mortgage under today's tax code. And that's going to result in serious tax savings for this individual, incremental to what the person who is aggressively paying down their mortgage early will receive.

16:49And that makes a difference over time. I think it's an important nuance to these pay off the mortgage or invest calculations. The tax angle is pretty impactful, especially in these, again, higher interest rate, higher balance mortgages.

17:01Mindy Jensen:Okay, Scott, does it change when you have the lower interest rate? Let's say we've got somebody who is about to be financially independent and quit their job. They are two years away from their fire number and firing. they've got$350 ,000 left on their mortgage at a 2.5 % interest rate. Oh, let's see. How many years should we have this loan term? Is that still 30 or is it like - Let's have the loan start date be something from 2021, right? So we've got a loan start date of June 6th, 2021, D-Day. That's my dad's birthday too. Happy birthday, Mr. Trench. June 6th, 2021. Okay. And so that's our new mortgage balance here.

17:43So what's this person ought to do at this point. Their loan amount, their remaining loan amount is$350.

17:47Mindy Jensen:Hold on. I want to change their investment assumptions as well. So they are married, filing jointly, 24 % tax bracket. They are more aggressive with the stock market and they think we're going to get a 6 % return for the first four years and then a 9 % return for the rest of them with a 20 % tax on the gate. So what does this magic scenario say to do? So in this scenario, they're going to obviously be way better off if they invest rather than prepay this mortgage, right? The calculator is not going to provide any surprises there. And that's going to be true at every stage in this journey, almost from the get go, essentially.

18:27So there's no question for this person under those assumptions that they'll be better off investing, right?

18:33Mindy Jensen:Right. So it really comes down to what do you think is going to happen? How long do you think it's going to happen? and play around. Again, this calculator can be found at biggerpocketsmoney.com slash mortgage dash calculator. And I think these are a lot of fun to play with because you can change all of these numbers just a little bit. I am in the don't pay off your mortgage camp because this is very similar to what my mortgage actually looks like. I believe that the stock market is going to be returning great returns for the foreseeable future. And if I'm wrong, you can email me, Mindy at BiggerPocketsMoney.com.

19:15Mindy Jensen:Scott thinks that maybe we're heading into a little bit of a squidgy market. So you can email Scott at BiggerPocketsMoney.com and tell him all about it as well. Let's look at my decision, right? So I decided not to take a mortgage, right? I decided I would not take a mortgage back in April, 2024, April 2nd. There we go. And so I would have gotten a mortgage of probably about 5.8 % at that point. And this would have been a big mortgage,$750, right? So I would have itemized. And I would have said at that point, you know, the initial return was pretty big, right? So we had a pretty good year in 2024 and 2025.

19:52So probably about like 12 % for one year, right? And then I'm going to say I'm going to be a little more conservative. I'm going to be like 5 % for the next 20 years. So let's see how, and I was in a high tax bracket. So let's go and update that. And I would have probably put, you know, 5 ,000 bucks a month towards this mortgage payment. So what did I do? Look at that. Because I'm a little bit more conservative in how I feel about the future state for the stock market, my alternatives here, my approach, I actually hadn't run that through this calculator prior to doing that down here. But yeah, it says that paying off the mortgage wins.

20:25And then I'll have about$144 ,000 more over the next 30 years than I would have under this scenario, right? Now, if I move that to 1.5 years, let's see. Yes, I'm still better off, right? If I increase that assumption, it's been about a year and a half since I bought that property. So I'll move that. The initial return is 12 % for the first year and a half on an annualized basis. So it's a fun little thing to play around with here. And you can kind of test your assumptions or maybe even go back and back test decisions that you've made if you've decided to pay off your mortgage or invest over the last couple of years.