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Wondering whether to pay off a mortgage or put the funds toward investments is a happy dilemma for some homeowners. The answer will depend on your financial situation, but let’s look at pros and cons of each along with a strategy that can allow you to combine the best of both worlds.

Paying Off a Mortgage vs Investing in the Market

Maybe you’ve socked away a nice savings. Or perhaps you inherited some money. If you’re trying to decide whether to put the money toward paying down your home mortgage loan or into the market, it helps to understand the mortgage payment process.

How Does a Mortgage Loan Work?

There are different mortgage types you likely considered when shopping for a mortgage, but in general, someone borrows money from a lender to buy a house at a certain interest rate and term length. As payments are regularly made (usually monthly), part of each payment goes toward the principal, lowering the balance. Early on in the life of your loan, the bulk of the payment will cover your interest charges. As the balance goes down, more of each payment typically goes toward the principal.

Recommended: Answers to Common Mortgage Questions

Components of a Mortgage Payment

You may hear the components of a mortgage payment summarized in an acronym: PITI. This stands for principal, interest, taxes, and insurance.

Principal

Initially, your principal is the amount of money you borrow. As you pay down your loan, the principal is the remaining (current) balance. When it comes to the mortgage loan payments themselves, the principal is the portion of the payment that goes toward the balance, reducing the amount. As noted above, as the balance goes down, more of your payment goes toward the principal and less to interest.

Interest

The interest is based on the interest rate charged on the loan’s principal, and these dollars go to the lender, serving as a key part of the cost of borrowing. As your loan balance goes down, less of your payment typically goes toward interest. Most mortgage loans have a fixed interest rate; others are variable, based on a certain financial index.

Move your cursor on the amortization chart of this mortgage calculator tool to see how principal and interest change over time.

Taxes and Insurance

A mortgage payment typically contains a month’s worth of property tax, which is based on the assessed value of the home and the tax rate where you live. A payment also may include a month’s worth of homeowners insurance and, if applicable, mortgage insurance that protects the lender in case of default.

Investment Gains vs Loan Interest Saved

At a high level, to determine which strategy can have the biggest positive financial impact, you can compare what investment gains you’ve had (or estimate future gains) and compare that to how much interest you would save when paying down your mortgage more quickly.

Pros and Cons of Paying Off Your Mortgage Early

Pros include the following:

•   You won’t have a mortgage payment anymore, which frees up money for other purposes: investing, paying for a child’s college expenses or wedding, and so forth.

•   You no longer have to worry about having the funds to make your payment. This can be especially helpful if unexpected expenses arise.

•   Typically, paying off your mortgage early will lower the amount of money that you pay in total interest — which means that you’ll pay less for your home overall.

•   Paying off a mortgage early gives you a guaranteed financial return, while there is always risk involved in putting money into the market.

•   If you need to borrow against the home in the future, none of the proceeds will be needed to pay off a current mortgage.

Cons include the following:

•   If the current stock market return rate is pretty good and your mortgage rate is low, paying off your mortgage early could have a lower rate of return than being in the market.

•   Your credit score could drop a bit because you’ll no longer have a mortgage in your mix of open types of credit.

•   Focusing on rapidly paying off a mortgage may cause someone to drain their emergency savings fund, something that’s not typically recommended.

•   Although uncommon now, some lenders charge a prepayment penalty for early mortgage payoffs. When this clause exists, it’s for the first three years of a mortgage. Check your mortgage note for specifics, or ask your lender or loan servicer.

•   When you no longer have a mortgage, you no longer qualify for the mortgage interest tax deduction.

Pros and Cons of Investing

Pros include the following:

•   Many times, when you buy shares of stock, you can get a good return on your investment in the long term. To get a sense of current returns, you can check the 10-year annualized return for the S&P 500.

•   If you’re in a workplace retirement plan, like a 401(k), your employer may match your contributions up to a certain amount.

•   Stocks are liquid assets, which means that you can buy and sell a portion of your portfolio at any time. You can’t really do that with a house. Plus, some stocks will provide you with dividends that you can reinvest or spend.

Cons include the following:

•   You could lose your entire investment in the stock market, including the initial investment. If you’re a common stockholder, you get paid last if a company defaults.

•   If you’re managing your own portfolio, you’ll need to invest time into investigating stocks, deciding what to buy and sell, and otherwise monitoring the stock market.

•   If you sell stocks at a profit, you’ll usually need to pay capital gains tax (although this can be offset if you also have some losses).

•   While investing, you’ll still need to make your mortgage payment (until the home is paid off).

•   Depending on your personality type, watching a stock that you own decline in value can be an emotional experience, and for some people, keeping tabs on their portfolio can be stressful. check that portfolio.

Evaluating Your Financial Situation

You may feel the urge to pay down your mortgage or make investments, but whether you should actually do so requires calculating two key figures: your net worth and your debt-to-income ratio (DTI). To determine your net worth, add up all of your assets (what you own) and subtract your liabilities (what you owe). Assets include your home’s value, vehicles, bank accounts, investments, and cash. Do not include your income. Liabilities are your mortgage, car, personal and student loans, credit card balances, and so forth. If you owe more than you own, the time may not be right to make a big investment — in either your home equity or the stock market — even if you are paying all your bills on time.

For the second metric — your DTI — add up your gross (pre-tax) monthly income as well as your monthly debt obligations, such as your mortgage, car payment, and other loan payments. Divide your total monthly debt by your total gross monthly income, and the resulting ratio (say, 0.30 or 30%) is your DTI. A lower DTI (say, under 30% or even 20%) indicates more cash flow to either put toward your mortgage or to invest.

Factors You Should Consider

Timing The earlier you can begin to apply extra payments to pay down your mortgage principal, the more you’ll benefit, because a lower principal will reduce interest over the life of the loan. That said, the earlier you can begin to invest, the longer you’ll have for your investments to build in value. Plus, because of compound interest, each dollar that you invest today will be worth more than a dollar that you would invest years from now.

Taxes Starting in 2018 and set to last through 2025, the federal government nearly doubled the amount of the standard deduction that taxpayers can claim. This means that far fewer people itemize their deductions, which in turn means that the mortgage interest deduction isn’t used by those taxpayers when they file their income taxes.

Home values If real estate values are dropping in your area, paying down your mortgage can help you from going underwater (owing more on the home than what it’s currently worth). Being underwater can make it more difficult to sell or refinance the home. Struggling homeowners can look for mortgage relief programs.

Recommended: Home Loan Help Center

Other Considerations

To this point, the post has largely focused on this question: Is it better to pay off a mortgage or invest? Let’s take a step back and look at issues to consider before doing either. First, do you have an emergency savings fund that could cover your monthly expenses for three to six months? If not, that’s a priority often recommended by experts.

Plus, if you have high-interest debt, such as credit card balances that you don’t pay off each month, it’s usually better to pay that off before either paying extra on your mortgage or investing.

Another strategy: You could consider refinancing your mortgage to a lower rate to lower your mortgage payment. Then, when you put extra money toward the balance, even more would go to the principal than when the interest rate was higher.

Deciding What’s Best for You

Pay off your house or invest? Perhaps the information provided has already allowed you to make a decision. However, there’s one more strategy to consider: doing both.

Best of Both Worlds: Funding Both at Once

Instead of simply considering two options, pay off mortgage or invest, another possibility meets in the middle: making additional contributions to your investments while also paying extra on your mortgage principal. This is most effective early on, but adds value through the life of the mortgage.

If the stock market becomes especially volatile or is significantly heading downward, you could focus on the mortgage paydown during that time period.

The Takeaway

Whether you choose to pay off a mortgage or invest depends on your financial situation and priorities. Each choice has pros and cons, but a best-of-both-worlds strategy is to do both.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Is there any disadvantage to paying off your mortgage early?

If a mortgage note includes a prepayment penalty, this can cost you money. Other disadvantages are loss of the mortgage interest tax deduction and a potential drop in credit scores. Plus, it may be more advantageous to invest those dollars instead.

Should I pay off my mortgage or save money?

It depends, but you definitely want to make sure you save up three to six months of expenses in an emergency fund before you pay down your mortgage.

Is it better to pay off my mortgage or invest for retirement?

Ideally, you can do both. If that’s not financially possible right now, weigh the interest rate on your loan and whether or not you benefit from the mortgage interest deduction on your tax return vs. what you think you might be able to earn on investments in the market. This will help you make your decision.

Should I invest when I have a mortgage and other debts?

If “other debts” include high-interest debt, such as credit cards that aren’t paid off in full each month, it typically makes sense to prioritize the payoff of that debt over investing. If your employer offers a retirement plan with a company match, you might want to prioritize that investment in order to capture the match. And if you are paying your current debts comfortably, investing more widely could be the right move.

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Photo credit: iStock/burcu saritas

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Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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A lifeline checking account is a basic bank account that features minimal fees and other cost-cutting elements, making it more accessible to first-time bank-account holders and those at lower income levels. These accounts can be, as the name indicates, a lifeline for those who are seeking firmer financial footing.

For example, a lifeline checking account may have no monthly maintenance fees, minimum balance requirements, or minimum opening-deposit requirements. Or they may have very low fees and requirements However, there are sometimes trade-offs to these sorts of accounts.

What Is a Lifeline Account?

A lifeline checking account is a bank account designed specifically for underbanked and low-income customers that often features no account fees. These accounts typically also offer additional consumer protections such as free overdraft coverage.

Having access to a bank account is an important step toward financial wellness. Without one, safely saving significant amounts of money and paying bills can become much more difficult. Recognizing this, some jurisdictions have laws in place requiring banks to offer low-cost accounts to consumers. For example, New York passed a law in 1994 requiring banks in the state to offer lifeline checking accounts to any customers who might want them.

Furthermore, the increase in digital-first and online banks has increased the public’s access to low-cost banking products. Online banks don’t have the same kind of costly overhead as banks that operate brick-and-mortar branches. For that reason, they’re typically more easily able to offer accounts with minimal fees, which may result in more affordable, accessible banking for more customers.

Recommended: How to Avoid Monthly Account Fees

How Do Lifeline Accounts Work?

Lifeline checking accounts work a lot like any checking account does. You open the account, deposit money into it, and then use those funds to pay bills and make day-to-day purchases. You can do so by using bank transfers, a debit card, or cash you withdraw from the bank or an ATM.

There is a main difference between lifeline and other accounts. Many typical checking accounts assess monthly maintenance fees or require a certain minimum balance to be maintained. These requirements may be waived in a lifeline account (or, if they’re still in place, the dollar amounts will be low).

Of course, bank accounts with higher fee structures do sometimes come with additional benefits that may make the fees worthwhile to certain customers. For example, with a lifeline checking account, you may not be able to use paper checks — or head into a physical bank to interact with a live teller. Still, for those whose choices are limited by financial circumstances, lifeline checking accounts can be… well, a lifeline. They’re also useful for anybody who’s hoping to minimize the amount they spend on banking.

Examples of Lifeline Checking Accounts

Lifeline checking accounts, or low-cost accounts that serve as lifeline checking accounts, are offered by many different financial institutions, including big box banks, regional credit unions, and online banks.

For example, as of early June 2024, BankFinancial offered a Lifeline Checking account that features overdraft protection services, free in-network ATM transactions, and a $0 minimum daily balance requirement. It charged a $5 monthly service charge — which is still pretty minimal in the world of brick-and-mortar banks. Wells Fargo’s lowest-cost checking account also assessed a $5 monthly service fee, though this cost is waived for account-holders between ages 13 and 24. The minimum opening deposit was $25, and there was no required minimum balance.

Pros and Cons of a Lifeline Checking Account

Like any other financial product there are both pros and cons to keep in mind when you’re considering a lifeline checking account.

Pros:

•   Low costs make these accounts more accessible to a wide range of consumers

•   Lifeline checking accounts can help any money-savvy account holder save more of their money

Cons:

•   Lifeline checking accounts may come without features considered “basic” by many, such as paper checks

•   Many lifeline accounts are offered by online banks, which don’t give account holders the option to bank in person

Being able to pay lower fees and keep more of your cash is a tremendous help to those who are just starting their banking lives and trying to manage their money or individuals who are earning a lower income. Lifeline accounts can play an important role when a person has limited cash.

But only you can determine what kind of banking products are right for you. To help you decide, here’s how the benefits and downsides of lifeline accounts stack up side by side.

Pros of Lifeline Checking Accounts	Cons of Lifeline Checking Accounts
Accessible to those who need a low-cost option	May not include “basic” features, such as checks
Offer savings to all money-savvy customers	Tend to be offered by online banks, so there’s no in-person support

How Can I Qualify for a Lifeline Checking Account?

If you’re ready to open a low or no fee bank account, here’s some good news: In general, qualifying for a lifeline checking account is pretty easy. You’ll just need to provide your proof of residence and other identifying and demographic information, and provide whatever minimum opening deposit is required, if there is one.

That said, some banks will look into your banking background before allowing you to open an account. For instance, they may use ChexSystems, which is a reporting agency that consolidates information about consumers’ banking behaviors. It’s kind of like a credit report, but for your interactions with banks. A poor ChexSystems record can make it impossible to qualify even for some low-cost accounts. However, there are still second-chance checking accounts out there that can provide the banking products you need while your ChexSystem record improves.

What Can I Do If I Cannot Find a Lifeline Account?

Fortunately, with the proliferation of online banking, lifeline-like checking accounts are pretty much everywhere — it’s simple to search for them online. It’s always a good idea to verify the validity of any online bank accounts you find, however, and to ensure that the accounts are FDIC-insured. That means you don’t have to worry about losing your hard-earned money if the bank goes out of business or loses revenue.

The Takeaway

Lifeline checking accounts are low-cost accounts that make it possible for people with lower incomes or those who are new account seekers to get the checking capabilities they need. These accounts often feature no or low fees and minimal beginning balances. The downside is that they may skip some banking basics, like paper checks. Fortunately, in our increasingly online world, this isn’t a deal-breaker. It may well be a trade-off that’s worthwhile to secure the convenience of a checking account.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.30% APY on SoFi Checking and Savings.

FAQ

Are there benefits for lifeline checking accounts?

Along with their low fees, some lifeline checking accounts do come with extra benefits such as free overdraft protection or ATM fee waivers.

Can I open a checking account with no money?

Yes! Although it’s not true of all lifeline checking accounts, some come with a $0 opening deposit minimum, which means you can start the account even if you don’t have any cash on hand right now.

Which banks are best for low income?

Whether your income is low or high, looking for a minimal fee structure is the best way to save money — in banking and beyond. Typically, online banks may offer lower fees and higher interest rates than bricks-and-mortar financial institutions.

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Photo credit: iStock/gorodenkoff

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

4.30% APY
SoFi members with direct deposit activity can earn 4.30% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.30% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.30% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/8/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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