Extra cash - go towards mortgage, or stock?
It's six of one a half dozen of another.   Investing the cash is a little more risky.  You know exactly what you'll get by paying down your mortgage.  If you have a solid emergency fund it's probably most advisable to pay down your mortgage.   If your mortgage is 3% and your investment makes 3.5% you're talking about a taxable gain of 0.5% on the additional cash.  Is that worth it to you? Sure, the S&P has been on a tear but remember, past results are not a guarantee of future performance. the math makes sense to invest instead of paying down, but... how much would you borrow at 3.5%, to invest the money into the stock market? It's the same question, just turned around.
"I strongly doubt your numbers, but lets switch the question around anyway.   Would you borrow 10k on your house to buy stocks on leverage?  That's putting your house at risk to have the chance of a gain in the stock market (and nothing in the market is sure, especially in the short term), and I would really advise against it.  The decision you're considering making resolves down to this one. Note: It is always better to make any additional checks out as ""for principal only"", unless you will be missing a future payment." Certainly, paying off the mortgage is better than doing nothing with the money. But it gets interesting when you consider keeping the mortgage and investing the money. If the mortgage rate is 5% and you expect >5% returns from stocks or some other investment, then it might make sense to seek those higher returns. If you expect the same 5% return from stocks, keeping the mortgage and investing the money can still be more tax-efficient. Assuming a marginal tax rate of 30%, the real cost of mortgage interest (in terms of post-tax money) is 3.5%*. If your investment results in long-term capital gains taxed at 15%, the real rate of growth of your post-tax money would be 4.25%. So in post-tax terms, your rate of gain is greater than your rate of loss. On the other hand, paying off the mortgage is safer than investing borrowed money, so doing so might be more appropriate for the risk-averse. * I'm oversimplifying a bit by assuming the deduction doesn't change your marginal tax rate. "You are effectively 'making' 3.8% right now. By maintaining a loan at 0% vs the 3.8% you'd otherwise pay, you are ahead by that percent.  Now, if you borrowed at 3.8%, and made 7.6% on your investments, taxes aside, you'd break even. you are exactly ahead by the same 3.8%.  It seems to me that with a break-even of 7.6%, you'd be taking a risk based on the market return over the next few years. In a sense, that's true for any of us, but in your case, you are not deciding where to put idle cash, you already have the 3.8% option of ""leave well enough alone."" This is where I'd quote Harry Callahan - 'you've gotta ask yourself one question: ""Do I feel lucky?"" Well, do ya, punk?'" "Forget, for the moment, which will pay off most over the long term. Consider risk exposure. You've said that you (hypothetically) have ""little or no money"": that's the deal-breaker. From a risk-management perspective, your investment portfolio would be better off diversified than with 90% of your assets in a house. Consider also the nature of the risk which owning a house exposes you to: Housing prices are generally tied to the state of the economy. If the local economy crashes, not only could you lose your job, but you could lose a good part of the value of your house... and still owe a lot on your loan. (You also might not be able to move as easily if you found a new job somewhere else.) You should almost certainly rent until you're more financially stable and could afford to pay the new mortgage for a year (or more) if you suddenly lost your job. Then you can worry more about maximizing your investments' rate of return." Other answers are already very good, but I'd like to add one step before taking the advice of the other answers... If you still can, switch to a 15 year mortgage, and figure out what percentage of your take-home pay the new payment is.  This is the position taken by Dave Ramsey*, and I believe this will give you a better base from which to launch your other goals for two reasons: Since you are then paying it off faster at a base payment, you may then want to take MrChrister's advice but put all extra income toward investments, feeling secure that your house will be paid off much sooner anyway (and at a lower interest rate). * Dave's advice isn't for everyone, because he takes a very long-term view.  However, in the long-term, it is great advice.  See  here for more. JoeTaxpayer is right, you will not see anything near guaranteed yearly rates in mutual funds, so make sure they are part of a long-term investing plan. You are not investing your time in learning the short-term stock game, so stay away from it.  As long as you are continuing to learn in your own career, you should see very good short-term gains there anyway. If you take the statement you quote as stated, it is indeed absurd. Unless you have a really creative tax accountant or live in a country with very unusual tax laws, any tax deduction you get for mortgage interest is going to be less than the interest. You don't come out ahead by getting a $25 deduction if you had a $100 expense to get that deduction. Where there can be some sense behind such a statement is if you consider the alternative to paying cash for a house or making extra payments against a mortgage. If you had $100,000 in cash in a box under your bed, and the choice is between, (a) use that $100,000 to buy a house in cash, or (b) borrow $100,000 at 6% interest and leave that cash in the box under the bed, than clearly (a) is the better choice because it saves you the interest expense. But if the choice is between, (a) buy a house for $100,000 in cash and borrow $100,000 at 6% to buy a car; or (b) borrow $100,000 at 6% interest to buy a house and use the $100,000 cash to buy the car, (b) is the better choice. The home mortgage loan is tax deductible; the car loan is not. As others have pointed out, if instead of using some extra cash to pay down the principle on your mortgage you used that money to invest in the stock market, it is likely that you would get better returns on the investment than what you would have saved in interest on the mortgage -- depending, of course, on how the market is doing and how well you pick stocks. But the key issue there isn't the tax deduction, it's the comparison of the profits from the investment versus the opportunity cost of the money that could have been saved on the mortgage interest. The tax deduction affects that comparison by effectively reducing the interest rate on the mortgage -- your real interest expense is the nominal interest minus the deduction -- but that's not the key point, just another number to plug in to the formula. By the way, given the complexity of U.S. tax law, I would not rule out the possibility that there could be some scenario where you really would save money by having mortgage interest. There are lots of deductions and credits that are phased out or eliminated as your income goes up. Perhaps you could find some set of tax laws that apply to you such that having an additional $1000 in interest expense lets you take a $300 deduction here and a $500 credit there, etc, and they add up to more than $1000. I don't know if that could actually happen, but the rules are complicated enough that, maybe. Any tax accountants here who can come up with such a scenario? "I'll assume you live in the US for the start of my answer - Do you maximize your retirement savings at work, at least getting your employer's match in full, if they do this. Do you have any other debt that's at a higher rate?  Is your emergency account funded to your satisfaction? If you lost your job and tenant on the same day, how long before you were in trouble?  The ""pay early"" question seems to hit an emotional nerve with most people. While I start with the above and then segue to ""would you be happy with a long term 5% return?"" there's one major point not to miss - money paid to either mortgage isn't liquid. The idea of owing out no money at all is great, but paying anything less than ""paid in full"" leaves you still owing that monthly payment. You can send $400K against your $500K mortgage, and still owe $3K per month until paid. And if you lose your job, you may not so easily refinance the remaining $100K to a lower payment so easily.  If your goal is to continue with real estate, you don't prepay, you save cash for the next deal. Don't know if that was your intent at some point.  Disclosure - my situation - Maxing out retirement accounts was my priority, then saving for college. Over the years, I had multiple refinances, each of which was a no-cost deal. The first refi saved with a lower rate. The second, was in early 2000s when back interest was so low I took a chunk of cash, paid principal down and went to a 20yr from the original 30. The kid starts college, and we target retirement in 6 years. I am paying the mortgage (now 2 years into a 10yr) to be done the month before the kid flies out. If I were younger, I'd be at the start of a new 30 yr at the recent 4.5% bottom. I think that a cost of near 3% after tax, and inflation soon to near/exceed 3% makes borrowing free, and I can invest conservatively in stocks that will have a dividend yield above this. Jane and I discussed the plan, and agree to retire mortgage free." If it's either/or, I'd pay down the mortgage, no question. I know I'm in the minority, but I'm not a fan of tax-advantaged retirement accounts.  There are too many things that can change between now and the next 30 years (the time frame that you'll be able to withdraw from your IRA account without penalty).  The rules governing these accounts can change at any time, and I don't think they'll be changes for the better. Putting the money toward your mortgage will relieve you of that monthly payment faster.  The benefits of IRAs come retirement age are too uncertain for my taste. "I think the basic question you're asking is whether you'd be better off putting the $20K into an IRA or similar investment, or if your best bet is to pay down your mortgage.  The answer is...that depends. What you didn't share is what your mortgage balance is so that we can understand how using that money to pay down the mortgage would affect you.  The lower your remaining balance on the mortgage, the more impact paying it down will affect your long-term finances.  For example, if your remaining principal balance is more than $200k, paying down $20k in principal will not have as significant an effect as if you only have $100k principal balance and were paying down $20k of that. To me, one option is to put the $20k toward mortgage principal, then perhaps do a refinance on your remaining mortgage with the goal of getting a better interest rate.  This would double the benefit to you.  First, your mortgage payment would be lower by virtue of a lower principal balance (assuming you keep the same term period in your refinanced mortgage as you have now.  In other words, if you have a 15-year now, your new mortgage should be 15 years also to see the best effect on your payment).  Further, if you can obtain a lower interest rate on the new loan, now you have the dual benefit of a lower principal balance to pay down plus the reduced interest cost on that principal balance.  This would put money into your pocket immediately, which I think is part of your goal, although the question does hinge on what you'd pay in points and fees for a refinance. You can invest, but with that comes risk, and right now may not be the ideal time to enter the markets given all of the uncertainties with the ""Brexit"" issue.  By paying down your mortgage principal, even if you do nothing else, you can save yourself considerable interest in the long term which might be more beneficial than the return you'd get from the markets or an IRA at this point. I hope this helps. Good luck!" Personally, I would split the difference, putting about half into each.  Simply because it balances out the problem and I don't have to fret about whether one or the other will provide a significant difference.  As bstpierre points out, the one which will make you more in the end is the one which you can grow the fastest.  The mortgage payment is locked at 5% growth, which, while modest, is also essentially guaranteed at this point.  The CD in your IRA is likely less than that amount, even after tax consideration. A couple additional points to consider: At the moment the interest rate... implies a variable rate mortgage.  I believe rates are only going to go up from here. So, if I were in your position, I would pay off the mortgage first.  If you don't have 3-6 months in savings for an emergency, I would invest that much money in low risk investments.  Anything remaining I would invest in a balanced portfolio of mutual funds. The biggest benefit to this is the flexibility it gives you.  Not being burdened by a monthly mortgage frees you up to invest.  This may be in your stock portfolio each month or it may be in your community or charitable causes. You have financial margin. "Forget the math's specifics for a moment: here's some principles. Additional housing for a renter gives you returns in the form of money. Additional housing for yourself pays its returns in the form of ""here is a nice house, live in it"". Which do you need more of?  If you don't need the money, get a nicer house for yourself. If you need (or want) the money, get a modest house for yourself and either use the other house as a rental property, or invest the proceeds of its sale in the stock market. But under normal circumstances (++) don't expect that buying more house for yourself is a good way to increase how much money you have. It's not. (++ the exception being during situations where land/housing value rises quickly, and when that rise is not part of a housing bubble which later collapses. Generally long-term housing values tend to be relatively stable; the real returns are from the rent, or what economists call imputed rent when you're occupying it yourself.)" An extra payment on a loan is, broadly speaking, a known-return, risk-free investment. (That the return on the investment is in reduced costs going forward instead of increased revenue is basically immaterial, assuming you have sufficient cash flow to handle either situation.) We can't know what the interest rates will be like going forward, but we can know what they are today, because you gave us those numbers in your question. Quick now: Given the choice between a known return of 3.7% annually and a known return of 7% annually, with identical (and extremely low) risk, where would you invest your money? By putting the $15k toward the $14k loan, you free up $140 per month and have $1k left that you can put toward the $30k loan, which will reduce your payment term by $1k / $260/month or about 4 months. You will be debt free in 14 years 8 months. You pay $14,000 instead of $16,800 on the $14,000 loan, reducing the total cost of the loan by $2,800, and reduce the cost of the $30,000 loan by four months' worth of interest which is about $175 (so the $30,000 loan ends up costing you something like $46,600 instead of $46,800). By putting the $15k toward the $30k loan, you cut the principal of that one in half. Assuming that you keep paying the same amount each month, you will reduce the payment term by 7 ½ years, and will be debt free in 10 years (because the $14,000 10-year loan now has the longer term). Instead of paying $46,800 for the $30k loan, you end up paying $23,400 plus the $15,000 = $38,400, reducing the total cost of the $30,000 loan by $8,400 while doing nothing to reduce the cost of the $14,000 loan. To a first order estimate, using the $15,000 to pay off the $14,000 loan in full will improve your cash flow in the short term, but putting the money toward the $30,000 loan will give you a three-fold better return on investment over the term of both loans and nearly halve the total loan term, assuming unchanged monthly payments and unchanged interest rates. That's how powerful compounding interest is. "From what I've read, paying down your mortgage -- above and beyond what you'd normally pay -- is indeed an investment but a very poor form of investment. In other words, you could take that extra money you'd apply towards your mortgage and put it in something that has a much higher rate of return than a house. As an extreme example, consider: if I took $6k extra I would have paid toward my mortgage in a single year, and bought a nice performing stock, I could see returns of 2x or 3x. Now, that implies I know which stock to pick, etcetera.. I found a ""mortgage or investment"" calculator which could be of use as well: http://www.planningtips.com/cgi-bin/prepay_v_invest.pl (scroll to bottom to see the summary and whether or not prepay or invest wins for the numbers you plugged in)" This may be a good or a bad deal, depending on the fair market value (FMV) of the stock at the time of exercise. Let's assume the FMV is $6, which is the break even point. In general this would probably be treated as two transactions. So overall you would be cash neutral, but your regular tax income would be increased by $30,000 and your AMT income by $60,000.