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Pay Your Mortgage Early or Invest?

If you have a $300,000, 30-year mortgage with an interest rate of 4.5%, you'd pay around $1,520 monthly. You have a guaranteed return on investment: When you prepay your mortgage, you always save on interest -- so you'll always get a return on investment. There's an opportunity cost: Every dollar devoted to paying extra on your mortgage is $1 you can't use for another financial goal. If your mortgage rate is 4.5%, your rate of return from prepaying your mortgage is just 4.5%. After 21 years of payments, you'd owe $134,783 on your $300,000 mortgage if you never made an extra payment. And, since you'd pay almost $80,000 less in interest, you'd lose around $17,600 in tax savings by not paying that interest if you deducted the full amount and were taxed at 22% each year you claimed the deduction. You could invest fairly conservatively and still end up earning a higher rate of return than current mortgage rates -- especially when factoring in tax breaks. Pay extra with your regular payments: You can simply add extra money to each payment you make. Avoiding prepayment penalties Before you start your prepayment plan, it's important to determine if there's an added cost associated with paying your mortgage early: prepayment penalties. If you'll have to pay a fee to prepay your loan, this is a big argument against prepayment since it makes the "return" on paying off your mortgage even lower.