FIRE with a Mortgage: Should You Pay It Off Early or Keep Investing?

---

title: "FIRE with a Mortgage: Should You Pay It Off Early or Keep Investing?" description: "Complete analysis of mortgage payoff vs investing for FIRE seekers: interest rate arbitrage, tax implications, psychological factors, and decision framework for late starters." date: "2025-12-09" author: "Jonathan" category: "Planning" readingTime: "13 min"

I have a mortgage. And every month when I write that check, I think: "Should I be dumping this extra $30K/year into paying this off, or should I keep investing it?"

It's the question that keeps FIRE pursuers up at night.

The math says one thing. The emotions say another. And as a business owner, the tax implications add another layer of complexity.

This post breaks down the mortgage payoff vs. investing decision with real numbers, scenarios, and the decision framework I'm using to figure out my own path.

The Core Question: Math vs. Psychology

Let's start with the basic math everyone cites:

Scenario 1: Pay off mortgage early

• Mortgage rate: 6.5%
• Guaranteed "return": 6.5% (the interest you avoid paying)
• Risk: Zero
• Tax impact: Lose mortgage interest deduction (if you itemize)

Scenario 2: Minimum payments + invest the difference

• Mortgage rate: 6.5% (cost of debt)
• Expected investment return: 6-8% (stock market historical average)
• Risk: Market volatility, potential losses
• Tax impact: Keep mortgage interest deduction, but pay capital gains taxes on investments

The math argument: If you can earn 7-8% investing and your mortgage is 6.5%, you come out ahead by investing.

The psychology argument: A paid-off house is guaranteed. Investments can crash. Debt-free sleep is priceless.

My take: Both are right. The answer depends on your specific situation, risk tolerance, and how close you are to FIRE.

The Full Financial Analysis (With Real Numbers)

Let me run the actual numbers for a typical late-starter scenario.

Example Profile:

• Age: 40
• Mortgage balance: $250,000
• Interest rate: 6.5%
• Years remaining: 20 years
• Monthly payment: $1,865 (principal + interest)
• Extra cash to deploy: $30,000/year

Option A: Pay off mortgage aggressively (extra $30K/year toward principal)

| Year | Balance | Interest Paid (Annual) | Total Paid | Years to Payoff | |------|---------|------------------------|------------|-----------------| | Start | $250,000 | — | — | — | | 1 | $206,000 | $15,625 | $44,000 | — | | 2 | $159,390 | $12,890 | $46,610 | — | | 3 | $109,848 | $9,861 | $49,542 | — | | 4 | $57,150 | $6,490 | $52,698 | — | | 5 | $0 | $2,715 | $57,150 | 5 years |

Total interest paid: $47,581
Payoff timeline: 5 years

After payoff: You have $30K/year + $22,380/year (former mortgage payment) = $52,380/year to invest for the next 15 years (until age 60).

Portfolio at age 60:

• Years investing: 15
• Annual contribution: $52,380
• Expected return: 6%
• Portfolio value: $1,220,000

---

Option B: Minimum payments + invest $30K/year

| Year | Mortgage Balance | Investment Portfolio | Net Worth | |------|------------------|----------------------|-----------| | Start | $250,000 | $0 | -$250,000 | | 5 | $226,130 | $169,110 | -$57,020 | | 10 | $197,130 | $395,290 | $198,160 | | 15 | $162,280 | $697,530 | $535,250 | | 20 | $0 (paid off) | $1,102,770 | $1,102,770 |

Total interest paid: $197,600 (over 20 years)
Portfolio at age 60: $1,102,770

---

The Verdict (Pure Math):

Option A (Aggressive Payoff):

• Net worth at 60: $1,220,000
• Interest paid: $47,581
• Debt-free at age 45

Option B (Invest the Difference):

• Net worth at 60: $1,102,770
• Interest paid: $197,600
• Debt-free at age 60

Winner: Option A by $117,230

Wait, what? I thought investing was supposed to win?

Here's why it doesn't in this scenario:

1. The mortgage rate (6.5%) is close to expected investment returns (6-7%)
2. Paying off the mortgage eliminates a guaranteed 6.5% cost
3. Once the mortgage is paid off, you can invest the full $52K/year for 15 years, which compounds significantly

Key insight: When mortgage rates are 6%+, aggressive payoff often beats investing, especially when you reinvest the freed-up cash flow.

But Wait: What About Taxes?

This is where it gets more complex, especially for self-employed business owners.

Tax Implication 1: Mortgage Interest Deduction

How it works:

• If you itemize deductions, you can deduct mortgage interest from your taxable income
• 2024 standard deduction: $14,600 (single), $29,200 (married)
• You only benefit if your itemized deductions (mortgage interest + state taxes + charity) exceed the standard deduction

Example (single filer):

• Mortgage interest paid in year 1: $15,625
• State taxes: $5,000
• Charity: $2,000
• Total itemized: $22,625
• Standard deduction: $14,600
• Benefit of itemizing: $8,025 extra deduction

At 24% tax bracket: $8,025 × 0.24 = $1,926 tax savings

But here's the catch: As you pay down your mortgage, interest decreases each year. By year 10, you're paying way less interest, and itemizing may no longer beat the standard deduction.

My situation (self-employed):

• I itemize because I have state taxes + business expenses + mortgage interest
• Early years: Mortgage interest deduction saves me ~$1,500-$2,000/year in taxes
• But as I pay down principal, this benefit shrinks
• By year 5-7, I might not itemize anymore (standard deduction would be higher)

Conclusion: The mortgage interest deduction is valuable in early years but becomes worthless as you pay down the loan.

Tax Implication 2: Investment Taxes

Investing in taxable brokerage:

• Qualified dividends: Taxed at 15% (most FIRE seekers)
• Long-term capital gains: Taxed at 15%
• Annual dividend yield: ~2% on a total market ETF

Example:

• $30,000 invested each year
• After 10 years, portfolio = ~$395,000
• Annual dividends: ~$7,900
• Tax on dividends: $7,900 × 0.15 = $1,185/year

Investing in tax-advantaged accounts (401k, IRA, SEP):

• No taxes during accumulation
• Taxes paid on withdrawal (ordinary income rates)
• For self-employed, this is often the better move

My strategy: I max my SEP IRA ($69K/year if I have a great year) before dumping money into taxable brokerage. This defers taxes and reduces my current tax bill, which offsets the benefit of the mortgage interest deduction.

Key insight: If you're investing in tax-advantaged accounts, you're not paying capital gains taxes during accumulation. This makes investing more attractive vs. paying off the mortgage.

The Interest Rate Threshold (When to Pay Off vs. Invest)

Here's my rule of thumb:

| Your Mortgage Rate | Recommendation | Why | |--------------------|----------------|-----| | Below 3% | Invest the difference | Easy 5-6% arbitrage vs. market returns | | 3-4% | Slightly favor investing | Small arbitrage, depends on risk tolerance | | 4-5% | Toss-up | Depends on tax situation and psychology | | 5-6% | Slightly favor payoff | Arbitrage shrinks, guaranteed return is attractive | | Above 6% | Strongly favor payoff | Guaranteed 6%+ return is better than risky 7-8% |

Current environment (2024-2025): Most mortgages are 6-7%. At these rates, paying off the mortgage aggressively makes more financial sense than investing in taxable accounts.

Exception: If you can invest in tax-advantaged accounts (401k, SEP, IRA), the tax benefit may tip the scales toward investing even with a 6%+ mortgage.

The Psychological Factor (This Matters More Than You Think)

Let me be honest: I hate debt.

Even "good debt" (low-interest mortgage) feels like a weight on my shoulders. Every month I see that balance, and it bugs me.

The psychological benefits of being debt-free:

✅ Reduced stress — No monthly mortgage payment hanging over you
✅ Lower expenses in retirement — Your FIRE number drops significantly
✅ Flexibility — If your business slows down or you lose a job, you're not scrambling to make mortgage payments
✅ Peace of mind — You own your home outright; no bank can take it
✅ Simplified FIRE planning — One less variable to manage

Example: How a paid-off mortgage lowers your FIRE number

With mortgage:

• Annual expenses: $69,000 (includes $22,380 mortgage payment)
• FIRE number: $69,000 × 25 = $1,725,000

Without mortgage:

• Annual expenses: $46,620 ($69K - $22,380)
• FIRE number: $46,620 × 25 = $1,165,500

Difference: $559,500 less needed

That's huge. By paying off your mortgage, you reduce your FIRE number by half a million dollars. That could shave 5-7 years off your timeline.

The Emotional Risk of Market Volatility

Scenario:

• You decide to keep your mortgage and invest $30K/year in the market
• Year 1: Market drops 30% (like 2008 or 2022)
• Your $30K is now worth $21K
• Meanwhile, you're still paying $22,380/year on your mortgage

How you'll feel: Like an idiot.

Compare this to:

• You pay off your mortgage aggressively
• Market drops 30%
• You don't care because you're debt-free and your housing cost is locked in

The guarantee vs. the gamble:

Paying off your mortgage is a guaranteed return equal to your interest rate. Investing is a probabilistic return that might beat your mortgage rate but could also lose 30% in a single year.

For late starters (35-50), guaranteed returns matter more because:

• You have less time to recover from crashes
• You're closer to needing the money (retirement)
• Psychological stress increases as you get older

My take: If you're 25 with a 3% mortgage, keep it forever and invest. If you're 40 with a 6.5% mortgage, pay it off and sleep better.

FIRE-Specific Considerations

1. How Close Are You to FIRE?

If you're 5-10 years from FIRE:

• Favor paying off the mortgage
• You want to enter retirement debt-free
• Lower expenses = lower FIRE number = earlier retirement
• Reducing risk matters more than maximizing returns

If you're 15-20+ years from FIRE:

• Favor investing
• You have time to ride out market volatility
• Compound growth over 15-20 years likely beats mortgage payoff
• You can always pay off the mortgage with your portfolio later

My situation (13 years to FIRE):

• I'm in the middle zone
• I'm currently investing because I max out tax-advantaged accounts first (SEP IRA)
• But once I hit my Coast FIRE number (~$850K in 5 years), I'll shift to aggressive mortgage payoff
• Goal: Enter retirement at 55 with zero debt

2. The Roth Conversion Ladder Complication

If you're planning to retire early (before 59½), you need a strategy to access retirement funds without penalties. The most common method is the Roth conversion ladder.

How it works:

1. During high-income working years: Max Traditional 401k/SEP IRA (get the tax deduction)
2. In early retirement: Convert Traditional → Roth each year, paying taxes at low rates
3. Wait 5 years
4. Access the converted principal penalty-free

The problem: You need money to live on for the first 5 years of retirement before your conversion ladder is accessible.

Solution 1: Keep a taxable brokerage account

• Don't pay off your mortgage aggressively
• Build a taxable brokerage account ($100K-$200K)
• Use this to fund the first 5 years of retirement

Solution 2: Pay off mortgage, then build taxable brokerage

• Pay off mortgage in 5-7 years
• Then dump all extra cash into taxable brokerage for the next 5-8 years
• Enter retirement debt-free with a taxable account to bridge the gap

I'm planning Solution 2 because it gives me optionality:

• Age 45: Mortgage paid off (if I push hard)
• Age 45-50: Build taxable brokerage ($200K+)
• Age 55: Retire with no mortgage, $200K taxable, $1.4M in retirement accounts

3. Rental Income and Real Estate Arbitrage

Alternative strategy: Don't pay off your primary residence. Instead, use that cash to buy rental properties.

Example:

• Keep your $250K mortgage at 6.5%
• Use $30K/year to save for down payments on rental properties
• After 2 years, buy a $200K rental with $40K down
• Rental income: $1,800/month = $21,600/year
• Mortgage payment (rental): $1,200/month = $14,400/year
• Net cash flow: $7,200/year

Over 10 years:

• Buy 3 rental properties
• Total net cash flow: $21,600/year
• Use this to pay off your primary residence mortgage

Why this can work:

• Leverage: You're using the bank's money to buy appreciating assets
• Tax benefits: Depreciation, mortgage interest on rentals
• Cash flow: Rental income can accelerate your FIRE timeline

Why I'm not doing this:

• I don't want to be a landlord (dealing with tenants, maintenance, evictions)
• Real estate requires hands-on management
• I prefer simple index fund investing
• Rental properties are not guaranteed cash flow (vacancies, repairs, bad tenants)

If you love real estate: This is a valid strategy. But it's not passive, and it's not risk-free.

The Decision Framework (How to Choose)

Use this flowchart to decide:

Question 1: What's your mortgage interest rate?

• Below 4%: → Keep the mortgage, invest the difference
• 4-6%: → Continue to Question 2
• Above 6%: → Strongly consider aggressive payoff

Question 2: How close are you to FIRE?

• 15-20+ years away: → Invest (time to compound beats guaranteed payoff)
• 10-15 years away: → Continue to Question 3
• 5-10 years away: → Lean toward payoff (reduce risk as you approach FIRE)

Question 3: How do you feel about debt?

• Comfortable with leverage, math-driven: → Invest
• Neutral, depends on numbers: → Continue to Question 4
• Hate debt, want peace of mind: → Pay off mortgage

Question 4: Do you have access to tax-advantaged investing?

• Yes, and I'm not maxing it out: → Max tax-advantaged accounts first, then reassess
• Yes, and I'm already maxing it out: → Continue to Question 5
• No (W-2 employee with no 401k): → Payoff mortgage becomes more attractive

Question 5: What's your marginal tax bracket?

• 32%+: → Invest in tax-advantaged accounts (huge tax savings)
• 24%: → Slight edge to investing if you max tax-advantaged accounts
• 22% or lower: → Payoff mortgage becomes more attractive

My decision (using this framework):

1. ✅ Mortgage rate: 6.5% → "Strongly consider payoff"
2. ✅ FIRE timeline: 13 years → "Lean toward payoff"
3. ✅ Debt comfort: "Hate debt" → "Pay off mortgage"
4. ✅ Tax-advantaged access: "Yes, maxing SEP IRA" → "Keep investing for now"
5. ✅ Tax bracket: 24% → "Slight edge to investing"

Conclusion: I'm investing for now (tax-advantaged accounts), but once I hit my Coast FIRE number (~age 45), I'll shift to aggressive mortgage payoff. Goal: debt-free by 50, fully retired by 55.

Real Scenarios: Three Approaches

Scenario A: Pure Math Optimizer (Invest)

Profile:

• Age 38, mortgage rate 6%, $300K balance
• Comfortable with debt and market risk
• Maxing 401k + IRA ($30K/year)
• Extra $20K/year available

Strategy:

• Keep making minimum mortgage payments
• Invest extra $20K/year in taxable brokerage
• Accept market volatility as part of the plan

At age 60:

• Mortgage paid off (22 years)
• Taxable brokerage: ~$700K
• 401k/IRA: ~$1.2M
• Total net worth: ~$1.9M

Pros: Maximum wealth accumulation
Cons: Carrying debt for 22 years, market risk

---

Scenario B: Hybrid Approach (Balance)

Profile:

• Age 42, mortgage rate 6.5%, $250K balance
• Neutral on debt, prefers balanced risk
• Maxing SEP IRA ($50K/year)
• Extra $30K/year available

Strategy:

• Max tax-advantaged accounts first (SEP IRA)
• Extra $30K/year split: $15K toward mortgage, $15K into taxable brokerage
• Pay off mortgage in 10 years (by age 52)

At age 60:

• Mortgage paid off at 52 (debt-free for 8 years)
• Taxable brokerage: ~$400K
• SEP IRA: ~$1.5M
• Total net worth: ~$1.9M

Pros: Balanced risk, debt-free 8 years before retirement
Cons: Slightly lower returns than pure investing

---

Scenario C: Aggressive Payoff (Security)

Profile:

• Age 40, mortgage rate 7%, $280K balance
• Hates debt, prioritizes security
• Maxing 401k ($23K/year)
• Extra $40K/year available

Strategy:

• Max 401k (employer match + tax advantage)
• Throw all remaining cash ($40K/year) at mortgage
• Pay off mortgage in 6 years (by age 46)
• After payoff: Invest $62K/year (extra $40K + former $22K mortgage payment) for 14 years

At age 60:

• Mortgage paid off at 46 (debt-free for 14 years)
• Taxable brokerage: ~$950K (14 years of $62K contributions)
• 401k: ~$800K
• Total net worth: ~$1.75M

Pros: Debt-free early, massive psychological relief, strong portfolio
Cons: Slightly lower total net worth than pure investing approach

---

My Take: What I'm Actually Doing

I'm firmly in the "invest the difference" camp—and I got lucky with timing.

My situation:

• Age 40, self-employed (roofing business, ~$1M revenue, 20% net margin)
• Mortgage rate: 2.75% (locked in during COVID—best financial decision I ever made)
• Current loan balance: ~$235,000
• Home value: ~$450,000 (appreciated 50% since purchase)
• Equity: ~$215,000
• Invested portfolio: Early stage (some crypto and stocks, haven't hit $100K yet)

My strategy:

1. Never pay off this 2.75% mortgage early (it's basically free money)
2. Max SEP IRA every year ($50-69K depending on business income)
3. Build taxable brokerage after hitting Coast FIRE (for flexibility before 59.5)
4. Let inflation erode the real cost of my mortgage over time

Why this works for me:

• My mortgage rate (2.75%) is way below expected investment returns (7-8%)
• Every dollar I pay extra on the mortgage only "earns" 2.75%
• Every dollar I invest can earn 7-8% long-term
• The math is a no-brainer: invest the difference
• My mortgage interest is partially deductible (self-employed, home office)
• I value liquidity in case business has a bad year (variable income)

The equity cushion gives me options:

• I have $215K in home equity if I ever need it (HELOC, cash-out refi)
• But I'm not touching it—it's my emergency backstop
• I'd rather build liquid investments than pay down 2.75% debt

What would make me change course:

• If my mortgage rate were 6%+ (I'd aggressively pay it down)
• If I were within 2-3 years of FIRE (I'd want it gone for peace of mind)
• Honestly, at 2.75%, probably nothing would make me pay it off early

Could I mathematically optimize this better? Maybe. But this plan leverages cheap debt, maximizes tax-advantaged growth, and gives me liquidity. That's worth more to me than being "debt-free" with a 2.75% mortgage.

Action Steps

1. Calculate your mortgage payoff scenarios using an amortization calculator with extra payments
2. Compare to investing scenarios using the FIRE calculator on this site
3. Run your numbers through the decision framework above
4. Consider your risk tolerance and psychology — math isn't everything
5. If you're maxing tax-advantaged accounts: Keep investing until you hit Coast FIRE, then shift to mortgage payoff
6. If you're not maxing tax-advantaged accounts: Do that first before paying extra on mortgage (unless rate is 7%+)
7. Set a timeline: Decide when you want to be debt-free (5 years? 10 years?) and work backward

Related Resources

• How to Calculate Your FIRE Number (Late Starter Edition) — Calculate your FIRE number with and without a mortgage
• How Much Do I Need to Retire at 50, 55, or 60? — Factor mortgage payoff into your retirement age planning
• Coast FIRE Calculator: How Much You Really Need — Determine your Coast FIRE number to know when to shift to mortgage payoff
• Solo 401(k) Guide for Self-Employed FIRE Seekers — Maximize tax-advantaged contributions before paying extra on mortgage

---

Disclaimer: I'm not a financial advisor, CPA, or mortgage professional. I'm a 40-year-old self-employed business owner working through this decision myself. Mortgage strategies, tax implications, and investment returns vary based on individual circumstances. This post shares my research and personal approach, but your situation is different. Consult qualified professionals (financial advisor, CPA, mortgage broker) before making major decisions. For full legal disclaimers, see our disclaimer page.