Should Physicians Pay off Their House or Invest More Instead? 

Physicians are no strangers to complex decisions. Diagnosing ailments, prescribing treatments and improving lives are all part of their daily routine. But what about their financial health?

Deciding whether to pay off their house early or invest more is a significant financial decision for doctors. It’s one that involves weighing student loans, side gigs and other financial commitments with their goals and tolerance for risk. In this article, we’ll discuss the factors to consider when making this decision as well as money management and investment strategies for physicians to help them navigate their unique financial landscapes.

Both are Good, but Which is Better for You?

For many physicians, especially those aspiring toward financial independence and early retirement (FIRE), eliminating debt is a priority. However, with historically low interest rates in recent years the trend has shifted slightly. Many have chosen to invest their surplus funds betting that investment returns will surpass the interest costs of their mortgages. However, as interest rates rise, how to decide becomes more nuanced.

Evaluating the Options

Before diving in, it’s important to ensure your financial foundation is solid. This means having an emergency fund, paying off high-interest debts and consistently investing in retirement accounts. If these basics aren’t covered, these should be your priority.

Here are some key considerations:

  1. Interest Rates vs. Investment Returns: Compare your mortgage interest rate with potential investment returns. If your investments could outpace your mortgage interest, investing might be the better option.
  2. Risk Tolerance: Your comfort with risk is important. Investments can yield higher returns but they come with volatility and no guarantees, unlike the predictable, albeit lower, return of paying off a mortgage.
  3. Financial Stability: Without a mortgage, your monthly expenses decrease, potentially offering more financial flexibility and less stress.
  4. Liquidity Needs: Money tied up in home equity is less accessible than funds in a brokerage account, which could be a consideration if you anticipate needing liquid assets.


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Understanding Mortgage Rates for Doctors

Mortgage rates play a pivotal role in determining whether physicians should pay off their house early or invest their surplus income. Here’s a concise breakdown of how different mortgage rates might influence this decision:

Low Mortgage Rates (Below 4%):

When mortgage rates are exceptionally low, the financial benefit of investing surplus funds typically outweighs the benefits of early mortgage payoff. Investments in the stock market or real estate could potentially offer returns significantly higher than the cost of mortgage interest, especially after accounting for compounding interest.

Most physicians with rates this low choose to invest, as the expected return on investments generally surpasses the cost of mortgage interest.

Middle Mortgage Rates (4%-6%):

In this range, the decision becomes less clear-cut. There is a narrow difference between investment returns and mortgage costs, making the choice more dependent on individual circumstances. Therefore, physicians need to closely evaluate their personal financial goals, risk tolerance and the specific terms of their mortgage.

High Mortgage Rates (Above 6%):

At these rates, the cost of the mortgage likely surpasses what could reasonably be earned through conservative to moderately aggressive investments. The financial risk of carrying a high-interest mortgage often outweighs the potential benefits of investing the money elsewhere.

Physicians with high rates might consider paying down their mortgage more aggressively to avoid high interest costs and reduce financial risk.


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Pros and Cons at a Glance

Ultimately, there’s no one-size-fits-all answer for everyone. While some doctors may benefit from the guaranteed return of paying down debt, others might find greater value in the potential for higher returns through investments. Each doctor must assess their own financial landscape to make their decision.

Paying Off the Mortgage:

  • Pros: Reduces monthly expenses, lowers risk, provides peace of mind.
  • Cons: Less liquidity, potential loss of tax benefits, possibly lower overall wealth growth.

Investing Instead:

  • Pros: Higher potential returns, funds remain accessible, aids in building retirement savings.
  • Cons: Less certainty regarding financial future, ongoing mortgage payments, potentially higher tax payments from investments  

Should You Do Both?

While doing the math is an important part of your decision, it isn’t the only consideration to keep in mind. For some, the psychological relief of being debt-free can be significant. If you’re nearing retirement, not having a mortgage can reduce the need for a higher income stream. At the same time, investments can be an additional financial resource, potentially offering higher returns and more significant wealth accumulation in the long run.

Striking a Balance

If you practice medicine and are still uncertain about which choice is right for you, a balanced approach might be ideal — investing in tax-advantaged accounts to the maximum and then using any extra funds to pay down your mortgage. This strategy allows for both debt reduction and portfolio growth, providing a diversified approach to managing finances.

Wondering why it’s hard for doctors to retire? It might be time to call the experts. Certified Financial Planners (CFP®) for physicians can provide tailored advice that aligns with your financial projections and long-term savings goals. They understand the unique challenges and security needs of physicians and can help you explore various investment options with a focus on long-term growth and debt management.

Disclosure: The opinions expressed within this blog post are as of the date of publication and are provided for informational purposes only. Content will not be updated after publication and should not be considered current after the publication date. All opinions are subject to change without notice, and due to changes in the market or economic conditions may not necessarily come to pass. Nothing contained herein should be construed as a comprehensive statement of the matters discussed, considered investment, financial, legal, or tax advice, or a recommendation to buy or sell any securities, and no investment decision should be made based solely on any information provided herein. Links to third party content are included for convenience only, we do not endorse, sponsor, or recommend any of the third parties or their websites and do not guarantee the adequacy of information contained within their websites.

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