Paper sludge generated from the paper industry is classified as solid waste, comprising primarily wood fiber with excellent toughness and CaCO3 with low thermal conductivity. The purpose of this work was to investigate the adaptability of paper sludge with wood fiber into cement-based insulation mortar. The addition of paper sludge with wood fiber was found to be beneficial for optimizing the performance of cement-expanded polystyrene (EPS)/paper sludge (CEP) mortar. In detail, the addition of paper sludge with low fiber content in the range of 2.5% to 7.5% improved the toughness and softening coefficient of CEP mortar. In comparison, an increase of wood fiber content notably improved the properties of CEP mortar when its addition level reached 15%. Additionally, paper sludge with different fiber contents decreased the thermal conductivity of CEP mortar, ranging from 0.0897 to 0.0885 W/(m·K). In conclusion, paper sludge with wood fiber exhibited good adaptability in CEP mortar.