Tuesday, March 1, 2022

Should I Pay Off My Mortgage Early?


If you ever need evidence of financial planning being an imprecise science, just look at the difference of opinion among financial experts over whether it is best to focus on paying off one’s mortgage versus directing extra money into [other] investments.  

On one hand is the school of thought that mortgages are “good debt” and usually come with low interest rates; so rather than accelerate payments it is better to invest the money in the stock market where, on average, the percentage of gains exceeds the interest rate on the mortgage.  So make 8% (or much more the last couple of years) in the stock market with that extra $5000 rather than save 4% by using it to pay down the mortgage.  Makes sense, right?

But not so fast, says another sizable group of financial advisors.  They point out that an extra $5000 (or any large or even not so large amount) applied to a mortgage continues to offer savings in the form of reduced accrued interest month after month, year after year, and without exception.  Can the stock market guarantee you will make money every month, every year?

Both schools’ arguments always seemed to be based on anecdotal evidence.  The “invest in the stock market” group has had its day recently with the historic highs on Wall Street.  But during a recession, the “pay off the house” gang looks like the savvier of the two.  I had never seen any solid research on the numbers until recently.  MoneyGeek.com has compared mortgage rates with returns of the S&P 500 stock index over a 43-year period and found that during certain times, paying down a mortgage gives better returns than investing in the market.

MoneyGeek.com looked at numbers from 1971 to 2013 and found that in 26 of those 43 years (60%) paying down the mortgage made for a better return on the money than investing in the stock market.  Moreover, evaluating every 10-year span out of those 43 years, they found that paying on the house beat stock market returns 63% of the time.

Well what about tax savings to be realized by having a mortgage?  Why not stretch out your mortgage so you may continue to deduct the interest on income tax returns?  That argument never made sense to me.  It may marginally improve the return on investment.  But why pay $10,000 in interest this year so next April you can reduce your taxes by 20% of $10,000?  Or 25% of $10,000, or even 37% ?  Unless your tax rate is 100% (and I don’t think any of us are there….yet), you will always be paying more in interest than you are saving on taxes.

But what swings my opinion on the matter is the psychological aspect of investing and home ownership.  Yes, according to MoneyGeek.com’s research, the odds are in your favor if you apply extra money to your mortgage.  But it also has the advantage of being a guaranteed return.  That spells peace of mind versus the emotional rollercoaster ride on which the stock market takes its investors.  And I can tell you from my own experience, going into retirement without a mortgage not only provides a lot of breathing room in a household’s budget but a sense of accomplishment and peace of mind. 

Financial advice must take into account the advisee’s unique circumstances.  But typically, I believe that if you have an emergency fund of at least six months’ income set aside, are adequately saving for retirement (investing at least 10% to 15% of your income; investing at least enough to obtain your company’s full match to your 401k account, if available), and have paid off other higher interest debt, accelerating payment on a mortgage has positive returns in more ways than one.

Until next time,



“The rich rule over the poor; and the borrower is slave to the lender.”  Proverbs 22:7