If you're deciding whether to pay off your mortgage early or invest, it boils down to one thing: interest rates

If you have a mortgage and cash to spare, you've probably considered paying off your loan early.

To be unencumbered by debt feels good, but paying down a mortgage years before you need to may not be the best way to build wealth, if that's your goal. Brian Fry, a certified financial planner who founded Safe Landing Financial, says making the right decision boils down to interest rates.

If the rate on your mortgage is higher than what you might make by investing the cash, it's often better to pay down your debt before investing more, Fry said.

In essence, you want your money to earn more than it would cost you elsewhere.

Pay off mortgage early or invest: The best actions you can take

Fry ran a simulation for Business Insider comparing different scenarios for a hypothetical homeowner. You can see the full list of assumptions at the end of this post.

In a simple comparison of interest rates — 5.38% historical average stock market return vs. 5.84% historical average mortgage interest rate — paying off the mortgage early wins.

However, that's not the best possible option. Since interest rates today are lower than the homeowner's current rate, the homeowner would benefit from refinancing their mortgage, he says. Fry says the homeowner can refinance to a 15-year fixed-rate mortgage at an interest rate of 3.19%.

Interest rates fluctuate and they're currently at historic lows, so be sure you shop around before making a decision or running your own numbers.

Pay off mortgage early or invest: The worst actions you can take

Fry says the worst financial decision the homeowner could make would be spending their extra income and not refinancing their mortgage or investing. Since the goal is to build wealth, spending cash won't move the needle.

The second worst option, according to Fry, would be ignoring the opportunity to refinance. Refinancing to lock in a lower interest rate can lower your monthly payments significantly, saving you thousands of dollars in interest over the life of the loan. As outlined above, whether you decide to pay off your mortgage more aggressively or invest aggressively, refinancing saves money.

Refinancing is best for people who aren't planning to move any time soon, in part because there are closing costs that run between 1.5% to 4% of the remaining mortgage balance.

Assumptions

To perform the calculation, Fry assumed the homeowner just got a raise that will net them an additional $24,000 a year after taxes. They are 15 years into their mortgage and have a remaining balance of $282,221 at an interest rate of 5.84%.

They have an established emergency fund and no other debt, and they're already maxing out their 401(k) and IRA. Their nest egg is diversified, and they are looking to make the best financial decision about how to use the extra income to maximize their wealth. This is important, as Fry doesn't recommend paying down a mortgage aggressively or investing more aggressively until the rest of your financial house is in order.

For the investment fund, Fry used the Vanguard Total Stock Market Index Fund, which has a long-term annual return of 5.38%, according to JPMorgan estimates. He said it's important to remember that the market doesn't go up by the same percentage every year: Some years offer better returns, while others may have negative returns.

According to his calculations, if the homeowner refinances their mortgage and invests what they save on monthly payments plus $24,000 a year, in 15 years they will have paid off their loan and have an investment account balance of $623,701. Fry says this is the best option for the hypothetical homeowner, who already has an emergency fund and is maxing out their retirement accounts. If you don't have your savings in order, take care of that first.

But unfortunately, investing in the stock market is a gamble and returns aren't always consistent year after year. If the homeowner still refinances for the lower interest rate, but wants to act more conservatively, "they can pay off the mortgage and then invest and still come out OK," Fry says. Their investment account balance at the end of 15 years would be $599,662.