There is no simple answer to this question as it depends on a number of key factors, namely the aspects or criteria of your mortgage and investments. By illustrating these factors you'll be better armed to make this choice. The question boils down to: Which of these - the investment or the mortgage repayment - takes greater advantage of the money you received?

A mortgage payment contains two aspects - the repayment of principal and the interest expense - that is charged by the financial institution holding your mortgage. The principal repayment goes towards the purchase price of the home and the interest is the expense charged for borrowing the money.

Let's assume you received a lump-sum payment of $50,000, and you have 10 years left on your mortgage. If you were to pay for it today it'd cost you $50,000 in principal. If you were to continue to make monthly payments until the end of the mortgage, you'd end up paying an extra $15,000 in interest payments (the amount of interest you pay is dependent on the mortgage rate). Using that $50,000 to pay it off today brings a savings of $15,000 in future interest expenses.

The other side of the question is the investment. There are several factors to weigh when evaluating an investment. The first is its expected return - is it so attractive, with high expectations of growth, or is it in the more conservative mutual funds or bonds category? The more attractive the investment, the more likely you'll invest the money.

If, for example, the investment is expected to earn 10% each year for the next 10 years - the same length as your mortgage - the $50,000 would turn into nearly $130,000. In this case, you'd want to put the money into the investment and make regular payments on the mortgage since the $15,000 you'd pay in interest payments would still leave you with $115,000 in profit.

However, a 10% return is not a very easy goal to achieve. At 5%, your $50,000 investment would turn into a little over $81,000 by the end of the 10 years. The higher the investment return, the more likely you are to invest than paying down the mortgage - but make note that these returns are never guaranteed.

What is important to your decision making is knowing your risk tolerance - the more risk you take, the higher your expected return. The stock market does provide exciting returns but it can also devastate like it did for many investors in 2000 when the dotcom bubble burst. If you can't handle the risk of losing a large percentage of your portfolio while still having to pay off your mortgage, it may be safer for you to just pay off the mortgage and save the $15,000.

For further reading, see Understanding The Mortgage Payment Structure and Be Mortgage-Free Faster.

  1. Do FHA loans have prepayment penalties?

    Unlike subprime mortgages issued by some conventional commercial lenders, Federal Housing Administration (FHA) loans do not ... Read Full Answer >>
  2. Can FHA loans be refinanced?

    Federal Housing Administration (FHA) loans can be refinanced in several ways. According to the U.S. Department of Housing ... Read Full Answer >>
  3. Can FHA loans be used for investment property?

    Federal Housing Administration (FHA) loans were created to promote homeownership. These loans have lower down payment requirements ... Read Full Answer >>
  4. Do FHA loans have private mortgage insurance (PMI)?

    he When you make a down payment from 3 to 20% of the value of your home and take out a Federal Housing Administration (FHA) ... Read Full Answer >>
  5. How many FHA loans can I have?

    Generally, the Federal Housing Administration (FHA) does not insure more than one mortgage per borrower. This is to prevent ... Read Full Answer >>
  6. Are FHA loans assumable?

    Loans insured by the Federal Housing Administration (FHA) on or after Dec. 15, 1989, are assumable by qualifying borrowers. ... Read Full Answer >>
Related Articles
  1. Stock Analysis

    Why did Wal-Mart's Stock Take a Fall in 2015?

    Wal-Mart is the largest company in the world, with a sterling track-record of profits and dividends. So why has its stock fallen sharply in 2015?
  2. Investing News

    Should You Invest in Disney Stock Before Star Wars?

    The force is strong with Disney stock, as it continues to make gains going into the launch of EP7. But is this pricey stock a good buy at these levels?
  3. Savings

    How Parents Can Help Adult Children Buy a Home

    Owning a home isn't easy thanks to stringent lending standards. Thankfully, there's ways parents can help their kids buy a home.
  4. Investing News

    Silicon Valley Startups Fly into Space

    Space enthusiasts are in for an exciting time as Silicon Valley startups take on the lucrative but expensive final frontier.
  5. Credit & Loans

    HARP Loan Program: Help for Underwater Mortgages

    If you are underwater on your mortgage, this program may be just what you need to help build up equity in your home.
  6. Insurance

    6 Reasons To Avoid Private Mortgage Insurance

    This costly coverage protects your mortgage lender - not you.
  7. Credit & Loans

    Pre-Qualified Vs. Pre-Approved - What's The Difference?

    These terms may sound the same, but they mean very different things for homebuyers.
  8. Home & Auto

    9 Things You Need To Know About Homeowners' Associations

    Restrictive rules and high fees are just some of the things to watch out for before joining an HOA.
  9. Mutual Funds & ETFs

    Buying Vanguard Mutual Funds Vs. ETFs

    Learn about the differences between Vanguard's mutual fund and ETF products, and discover which may be more appropriate for investors.
  10. Mutual Funds & ETFs

    The 8 Most Popular Vanguard Funds for a 401(k)

    Learn about some of the mutual funds in Vanguard's lineup that are popular among 401(k) investors, and find out why you should consider them.
  1. Encumbrance

    A claim against a property by a party that is not the owner. ...
  2. Equity

    Equity is the value of an asset less the value of all liabilities ...
  3. Chattel Mortgage Non-Filing Insurance

    An insurance policy covering losses that result from a policyholder ...
  4. Total Annual Loan Cost (TALC)

    The projected total cost that a reverse mortgage holder should ...
  5. Forbearance

    A temporary postponement of mortgage payments.
  6. Mortgage Modification

    A permanent change in a homeowner's home loan terms that makes ...
Hot Definitions
  1. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  2. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  3. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  4. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  5. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  6. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
Trading Center