Once you are settled into your home, you may find yourself with extra cash at the end of the month. This brings up one of the most common debates in personal finance: should you make extra principal payments to pay off your mortgage early, or should you invest that money in the stock market?
The answer comes down to a mix of mathematical return and psychological peace of mind. Mathematically, it depends on your interest rate. If you secured a mortgage a few years ago with a historically low rate of 3%, investing your extra cash in a diversified retirement account (which historically returns around 7% to 10% annually) will build you more wealth over the long term.
However, if you purchased your home recently with a mortgage rate of 6.5% or 7%, the math shifts. Every extra dollar you put toward your principal is essentially a guaranteed, risk-free 7% return, as it immediately stops generating interest. Adding just $100 extra a month toward your principal can shave years off your loan term and save you tens of thousands of dollars in lifetime interest.
You can read more about evaluating financial tradeoffs and managing your long-term debt through the CFPB Owning a Home Guide.