I get this question often: “Should I pay off my low-interest mortgage or invest the money?”
And the answer is: Yes. Well, yes, pay off your mortgage if we’re talking about your primary residence. I understand the math problem here. Many financial planners and advisors (and accountants and others) will certainly argue the math problem. Why not invest the money you were going to use to pay off the mortgage?
With mortgage interest rates in the 2.50-3% range (current 30-year fixed as of 7/15/21), and long-term historical returns for stock-based mutual funds multiples of that number, PLUS, factor in the tax deductibility of mortgage interest, and it seems like we should NOT pay off the mortgage and invest the money. I say, not so fast, Einstein.
One factor that is hard to calculate is the risk factor involved in investing. The mortgage interest rate is guaranteed once it is locked-in. The investment return of stocks and stock-based mutual funds is variable and not guaranteed. Another factor that is hard to calculate from a math perspective is the psychic value of paying off one’s mortgage. Yes, my house doesn’t care or even know if there is a mortgage on it. Yes, a potential buyer doesn’t care if my home has a mortgage on it or not. But I know. When you no longer have debt against your home it promotes an unbelievably euphoric feeling. Laying your head on your pillow at night knowing you owe no one for your home is an almost indescribable feeling. We’re talking about your home here.
I’m not proposing this for business and investment debt. I’m strictly talking about your home. It has always been a very important part of the American Dream to own one’s home. Some say that is changing. Based on the demand for residential real estate in this country, I propose it is not changing very quickly. Most folks I see and talk to still want to own their own home. If the premise of investing the mortgage money instead of paying off the mortgage was such a great idea mathematically, and the decision is being made strictly on a mathematical basis, then why not just take an interest-only mortgage and only pay the interest – investing the principal amount of one’s equity. I don’t buy that idea.
Again, I understand the math here. But I also understand the psychological value of having your home debt-free. In my 35 years of practice, I have seen a lot of folks pay off their mortgage. For many people, it is one of the happiest moments in their life. A real milestone for most.
The other point worthy of mention here is that most folks who have a definite plan for paying their home mortgage off early also have a plan for saving and investing additional money. In fact, most people who are paying additional payments on their mortgage are saving additional money at a rate higher than most other folks who are not making additional payments. My belief is that this is because these pre-payers, if you will, are more disciplined and have a more structured long-term savings plan. That has certainly been the case with many of the folks in my practice. Virtually all of the accelerated mortgage payers in my practice save way more than those who simply pay their mortgage at the regular level. These pre-payers seem to become more diligent at saving as they accelerate their mortgage payments. They also, by the way, have way less debt of all kinds than the average American. Which, in my view, is a really good thing for all of us. Less debt = less stress. Simple math. Simple concept. Wonderful outcomes.
I’m not saying we shouldn’t live. As I often say in my practice, we like our clients to “live today with an eye toward tomorrow.” This simply means that we understand life is short. We should live well today. We should also save some back for a rainy day. Some folks in our profession encourage investing simply from a math perspective. I don’t agree with that line of thinking. There are many factors that should be considered in financial planning. The math problem is only one factor. If you would like some help in your financial life, please give us a call. That’s what we do: We help people. We’re different on purpose.
-by Ben Smith
Registered Principal, RJFS
313 East 10th Ave. • Bowling Green, KY 42101 • Phone: 270-846-2656
The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of the author, and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision.
Ben Smith Life Compass Financial is not a registered broker/dealer and is independent of Raymond James Financial Services, Inc. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc.
