Here's why paying off your mortgage might be better than investing.

Adobe / Eng ffisjebdk
Mar 30 23 Comments

I've heard both arguments. Pay off your mortgage and invest the money because the return is higher and the mortgage is a low interest loan.
Let's talk real numbers. I owe 150k on my mortgage. At least that's what the bank says. But if I look at the amortization schedule I actually owe 150k principal and 75k in interest.
If I pay off my mortgage early I save myself 75k in interest. What if I instead invest the money over the remaining time on the loan. So I went to investor.gov and used their compound interest calculator. I set the initial investment at 150k, no monthly contribution because I'm still paying my mortgage, length to 23 years (that's how long I have left) estimated interest to %12 with a %12 varience because average returns are estimated at %12 and highs have gone higher and lows have been lower. So this shows that at the end of 23 years if I invested my money instead of paying off my mortgage I could have in the best case 5.8 mil, in the average case 900k and in the below average case my initial investment of 150k. Next I said what if I invested 1k but then contribute my monthly payment since I paid off the loan. Everything else stayed the same. Now in the best case I have 2.8 mil, average case 800k and worst case 24k.
So in the average case I'm only 100k better off investing instead of paying off my mortgage. But there are some benefits associated with paying off the mortgage that there aren't when investing instead
- peace of mind
- you control your money from now on, no bank is forcing you to make a payment
- you can change careers because your living expenses are drastically reduced.
- easier to take on another mortgage for an investment property

I'm interested to hear counter opinions. Why is investing better than paying off a mortgage? What did I get wrong in my scenario here?

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TOP 23 Comments
  • Apple
    badApple5

    Apple

    PRE
    Facebook
    badApple5more
    Arent mortgage interests tax deductible? That gives another incentive to invest instead of paying off mortgage.
    Mar 30 11
    • Google PageRanker
      Oath. how do you define most?
      We were unable to deduct any house-related expenses in 2018. Our income/housing expenses are fairly typical for people here on Blind.
      Mar 30
    • Oath / Mgmt Atinlay1
      Also untrue. It applies only to people in a high tax state. “Tech people” has absolutely nothing to do with it.
      Mar 30
    • Cisco bitset
      @atin. I care about myself and my tech friends. Don’t have time to think about everyone 😀. So cutting stories short, we were unable to deduct mortgage interest as we did last year. So paying off mortgage could be better
      Mar 30
    • Microsoft pJcW86
      If you have high tc with a large mortgage payment and the Trump tax increase affected your ability to itemize, you need to fire your CPA/financial advisor and start finding ways to increase your deductions.
      Mar 30
    • Cisco bitset
      @pjcw86, I tried turbo tax and Cpa. Both gave same numbers. Unfortunately a lot of us are in same boat. Trump tax is turning out bad for a lot of people
      Mar 30
  • Oath / Mgmt Atinlay1
    Didn’t like the answers you got in your last post on this?

    Check out this post! "Suggestions for what do do with some money? (Money)"
    https://usapi.teamblind.com/s/yVmLg287
    Mar 30 1
    • Adobe / Eng ffisjebdk
      OP
      My last post wasn't debating the value of investment over paying off the mortgage. I liked the answers fine.
      Mar 30
  • Amazon / Eng tylium
    Sounds like you are over complicating.

    For your mortgage im guessing your interest rate is around 4%. If you itemize and deduct your interest on taxes, its more like 3% out of pocket.

    If you invest in s&p500 the rate is 8% on average over 10 years. Highs and lows? Yes. Lets just assume you are smart enough not to panic sell on a low.

    3% return vs 8% return. Those are the options. Stock is more luquidable. You can hypothetically take the gains of your stock and pay down your mortgage for free.

    A popular quote: dont work for money. Make money work for you. Paying off your mortgage keeps you in the rat race of optimizing your monthly salary vs expenses and makes you rich. Investing your cash and utilizing debt as a tool makes you wealthy.
    Mar 30 2
    • Apple
      badApple5

      Apple

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      Facebook
      badApple5more
      Cant just deduct tax for mortgage and not for capital gains. Taking 20% long term capital gains would make it 6.5%. So it’s 3% vs 6.5%
      Mar 30
    • Amazon / Eng tylium
      Was talking about interest. Selling stock and selling home are too different to directly compare and was not the topic of discussion. After all paying down a home will lead to an eventual capital gains - the same rate as stocks.
      Mar 30
  • New / Product
    qGcU18

    New Product

    BIO
    Designer and business development prefers working with innovation teams, design labs. Highly conceptual, communications, motivator and team leader.
    qGcU18more
    In the U.S. it doesn't pay to payoff your mortgage. 1. Homestead exemprion, in CA you're only able to shield $100K of your home's value.
    2. You lose mortgage interest deductions.
    3. Mortgage rates are so low now there's no cheaper loan.
    Makes no sense to pay off. Alternatively, deposit the payoff amount into a higher yield investment that can be liquidated to pay off the mortgage, is an ideal alternative.
    Apr 1 1
    • Adobe / Eng djrbssjkam
      I'm not sure why 1 matters. 2 doesn't make sense. Why would I care about the tax deduction? Are you saying you prefer a interest deduction over having your money for something else? I spend like $14,000 a year on my mortgage and get like $6,000 in interest deductions. If I pay off my mortgage then I get $14,000 a year to do what I want with. Even factoring in the loss of the deduction I'm still better off with out a mortgage payment.
      3 yes this is true but I also don't need or want loans for anything other than a house so I don't think it really matters that it's the cheapest kind of loan. I still don't see how paying off a mortgage is a bad idea. I would love for you or anyone to give an example with real numbers that shows why keeping the loan is better than paying it off. I'm willing to change my mind I just need some good examples.
      Apr 1
  • Facebook public2
    Interest is tax deductible. The only argument for paying off a mortgage early (especially at today's rates) is peace of mind (if you don't believe in math). Do it if you want, not everything had to be about optimizing for money.
    Mar 30 1
    • Adobe / Eng ffisjebdk
      OP
      Can you elaborate on the math? What am I missing in my example that makes the investment option better?
      Mar 30
  • Google PageRanker
    If you can invest at 12%, it beats the 3% you pay in mortgage interest.
    100K difference is almost as high as your initial investment!
    But 12% is an assumption which not guaranteed.
    You are comparing high risk investment with no risk.
    Mar 30 1
    • Apple
      badApple5

      Apple

      PRE
      Facebook
      badApple5more
      3% is very low. Wish i had 3%..
      Mar 30