I’ve had enough people ask me about this topic now that I feel it deserves an additional blog post. I briefly addressed it here, and I’ll address it briefly again.
Why pay off a low interest rate mortgage (~3-5%) early when you could earn ~8-12% in the stock market?
To most people, the smarter and more financially savvy thing to do is to invest any extra money in the stock market and pay off your mortgage slowly. The logic is that you are borrowing money at around ~3-5% on the mortgage to earn ~8-12% in the market, giving you a margin of ~3-9%.
I don’t disagree at all with that logic, but what it fails to address is risk. Here’s a great article by 60 Minute Finance that echoes my sentiments much more eloquently than I can. And here’s a snippet from that article that provides a different perspective using a hypothetical scenario:
…let’s address the question of which is a better use of available cash: Pay off the house early or invest?
Too often the question is only asked one way: Assuming you have a mortgage, would you apply extra payments to it, or instead make only the required payment and invest the difference? It’s less frequently asked the other way: If you have no mortgage, would you borrow money against your home for an investment?
It really is a matter of personal preference and risk tolerance. Some people are risk seekers / risk lovers whereas others are risk averse. I like to think I’m somewhere in the middle, but maybe I’m more risk averse.
For me, having a paid-for house is more valuable than carrying debt and earning a few percent more in investments. Yes, I won’t have a mortgage interest tax deduction anymore, but I’d rather not pay interest just for the purpose of getting a little bit of that back from the government.
To be clear, I’m not forgoing investing completely. We still invest a little over 15% of our income in our retirement accounts. But for now, I’ll be continuing to apply any extra funds to our goal of paying off the mortgage early. Once that’s taken care, we will move on to our bigger goal of financial independence.
And for those who have time, here’s another article that addresses the question by Modest Money. He mentions another great benefit of not having a mortgage: better cash flow.