When you have excess income beyond the normal monthly expenses, there are two options which might be preferable to just leaving it in the bank. You can pay down your mortgage, reducing the overall cost in interest and increasing your equity, or you could invest in any number of opportunities and hope to increase your gains. Here are some tips on whether you should pay down your mortgage or invest the money.

Let’s say you have $5000 extra, and the mortgage has five years left at 6.25% interest, with $25,000 remaining principal. If you pay down $5000 now, the monthly payments will reduce by almost $100/month, and the overall cost of the remaining loan would decrease by $5835 - a savings of $835 interest.

The easiest options to compare with paying down your mortgage are low-risk investments with a specific rate of return, like money market accounts and certificates of deposit (CDs). For example, investing the $5000 in a 2.5% money market account should produce $125 in earnings over the next year, or $657 in five years.

Some banks offer five-year CDs with 5% interest; this should generate total earnings of $1,381. This is $546 more than the mortgage savings produced by the same amount of money; however, it is considered taxable income. Another option is to purchase a $5,000 Treasury I Bond. This could be withdrawn after five years without penalty, and would produce $1,333 interest (4.84%).

There are many other ways to invest money, such as buying stocks, commodities, precious metals, or starting a business. These opportunities offer a less certain level of return and involve higher risks, but do have the potential to produce much greater gains than paying down the mortgage or using the above-mentioned low risk investments.

Aside from the monetary advantages of either option, there are other factors which should be considered. Choosing to pay down the mortgage is easier, less time-consuming, and less complicated. To invest, you will have to spend a lot of time researching the wide range of choices available to investors. Even after you invest, monitoring the investment’s progress will be necessary.

There are also some factors which affect the level of savings when you pay down your mortgage. If your income is high enough to deduct part of your mortgage interest from taxes, this decreases the importance of paying down the mortgage early; however, limits apply and the deduction varies depending upon your income level. If your mortgage has a prepayment penalty, you may want to invest instead; a large fee must be paid if you pay it down early.