Should I Pay Off My Mortgage Early or Invest My Savings?

He
could
also
see
we
had
the
cash;
it
was
sitting
in
our
Vanguard
municipal
money
market
fund,
earning
much
less
than
our
2.875%
mortgage
rate.
In
other
words,
mortgage
paydown
promised
a
higher
return
on
our
money
than
it
was
earning
in
our
investments.

We
had
been
hanging
on
to
the
mortgage
because
a
mortgage
rate
of
less
than
3%
seemed
like
a
great
deal
(and
it
certainly
was
relative
to
our
very
first
mortgage
of
8.75%
in
1994).
But
the
numbers
and
our
household
balance
sheet
argued
otherwise.

An
inflation
spike
and
plenty
of
rate
hikes
later,
the
calculus
around
mortgage
paydown
has
changed
meaningfully.
People
with
newer
mortgages
(and
higher
interest
rates)
may
still
want
to
accelerate
mortgage
paydown
versus
steering
cash
into
their
investment
portfolios.
But
many
homeowners
with
more
seasoned
loans
will
want
to
hang
back.
That’s
because,
now
that
yields
and
expected
returns
on
safe
investments
are
also
higher,
they
can
readily
earn
a
higher
return
by
investing
than
they
could
earn
by
paying
down
debt.

If
you
face
the
very
common
conundrum
of
whether
to
pay
extra
on
your
mortgage
or
invest
in
the
market,
ask
yourself
the
following
questions.

1.
Do
I
Need
The
Liquidity?

A
key
starting
question
is
whether
you
might
need
access
to
this
money
in
future.
If
you
do,
that
argues
against
steering
a
big
share
of
your
available
funds
toward
paying
down
a
mortgage.
You
can
tap
home
equity
via
equity
release
if
you
need
to,
but
it’s
obviously
much
simpler
to
dip
into
an
investment
fund
if
you
have
a
cash
need.

2.
How
Do
The
‘Returns’
Compare?

Ask
yourself
this:
how
does
the
return
on
investment
(ROI)
of
a
mortgage
paydown
compare
with
investing
in
the
market
itself?

The
core
“return”
from
debt
paydown
is
straightforward:
whatever
your
mortgage
interest
rate
is.
What’s
interesting
is
mortgage
holders
today
hold
loans
with
a
broad
range
of
interest
rates,
depending
on
when
they
took
out
the
loan
or
last
refinanced.

Interest
rates
dropped
significantly
during
the
global
financial
crisis
of
2009
and
dipped
lower
still
during
the
pandemic,
making
it
a
wonderful
time
for
borrowers
to
secure
new
loans
or
refinance
existing
ones.
For
those
borrowers
securing
a
mortgage
today,
however,
they’ll
have
to
clear
a
higher
hurdle
with
their
investments
than
will
people
with
older
mortgages
and
lower
rates.

Deciding
on
what
type
of
return
to
assume
for
your
investments
is
tougher.

Because
the
“return”
you
earn
from
mortgage
paydown
is
guaranteed,
the
most
conservative
investment
comparison
is
with
an
investment
type
that’s
similarly
guaranteed.

That’s
the
benchmark
that
my
husband
and
I
used
when
we
decided
to
pay
off
our
mortgage:
we
had
cash
in
our
account
that
was
earning
an
interest
rate
substantially
lower
than
the
rate
on
the
debt
we
were
servicing.

With
today’s
higher
yields
on
cash
and
bonds,
however,
mortgage
paydown
might
not
add
up
for
people
with
older
loans.
In
my
recent
roundup
of
capital
markets
forecasts,
for
example,
most
investment
firms
were
forecasting
a
10-year
return
for
US
bonds
of
5%
to
6%.

Forecasts
for
cash
returns
are
generally
lower
than
for
bonds,
largely
because
cash
yields
can
be
ephemeral;
today’s
higher
cash
yields
may
not
persist
into
the
future,
especially
if
start
seeing
interest
rate
cuts
later
this
year.

3.
What
Life
Stage
Am
I
At?

In
a
related
vein,
life
stage
and
time
horizon
can
affect
the
attractiveness
of
debt
paydown
versus
investing.
More
risk-tolerant
types –
specifically:
younger
people
with
very
long
time
horizons
until
retirement –
might
avoid
mortgage
prepayment
in
favour
of
equity
investing.
While
stock
returns
are
not
guaranteed,
history
suggests
that
over
a
several-decade
period,
they’ll
likely
be
higher
than
even
today’s
higher
mortgage
rates.

But
if
you’re
getting
close
to
retirement,
that
means
your
time
horizon
until
you’ll
need
to
begin
tapping
your
portfolio
has
also
shortened.
It
also
likely
means
your
investment
mix
has
gotten
more
conservative
and
your
expected
portfolio
return
has
declined.

In
that
instance,
your
investments
might
not
necessarily
outearn
your
mortgage
rate.
Moreover,
permanently
(or
at
least
semipermanently)
reducing
your
fixed
expenses
by
paying
off
your
home
can
be
more
impactful
to
your
plan
than
making
additional
investment
contributions
later
in
life.

4.
Does
My
Mortgage
Have
a
Pre-Payment
Penalty?

While
prepayment
fees
are
less
common
than
they
once
were,
some
lenders
charge
prepayment
penalties
to
discourage
early
mortgage
payoff.
Contact
your
lender
or
read
the
fine
print
in
your
existing
mortgage
documents
to
see
if
this
applies
to
you.

5.
Do
I
Need
Peace
of
Mind?

If
the
maths
around
whether
to
prepay
a
mortgage
is
kind
of
squishy –
for
example,
your
mortgage
rate
and
your
expected
portfolio
return
are
both
about
5% –
peace-of-mind
considerations
are
a
good
tiebreaker.

What
brings
peace
of
mind
varies
with
each
individual,
though.
Being
debt-free
feels
great
to
my
husband
and
me,
but
I
recently
suggested
mortgage
paydown
to
a
friend
who
is
between
jobs,
has
the
cash,
and
is
over
60.
She
shuddered
and
told
me
that
she
hated
the
idea
of
pulling
down
her
loan
balance
that
much
and
felt
confident
her
portfolio
would
outearn
her
5%
mortgage
rate.
That,
clearly,
was
the
right
call
for
her.

Christine
Benz
is
director
of
personal
finance
at
Morningstar.
This
piece
was
originally
published
on
Morningstar.com
and
has
been
edited
for
UK
audiences

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