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Relative Rate of Return

Mark Cappel
UpdatedJan 12, 2010

Should I pay-off my mortgage early or use those funds to invest?

I'll be 56 next month, and was wondering if I would be better served attempting to pay extra on my home mortgage with about 15 years to go @ 6.75% or invest the money into some sort of interest bearing account. I quite comfortable investing $500 in either.

I become frustrated when financial gurus harp on homeowners saving $X over the life of a mortgage by paying the balance early but not discuss relative rates of return or the tax deduction homeowners get for mortgage interest expense.

Of course, paying less in interest expenses is A Good Thing, but not if you can put the money you use to pay off the mortgage early to more productive use. If I understand your question correctly, you have a fixed mortgage at rate of 6.75%. You have $500 you can put towards retiring the debt or into investing. One missing piece in your equation is the rate of return on your investing. Look at the relative rate of return on investment vs. the interest rate on the mortgage, keeping mind that Uncle Sam is underwriting part of your mortgage interest expense.

Another missing piece of the equation is the amount of retirement savings you have. A third missing piece is how long you expect to work.

If you can exceed 6.75% in your investing, then investing is the smart place to put the $500. If you cannot, then retiring the mortgage early will provide these benefits:

 • You slash your interest expense.

 • You have the peace of mind knowing your home is 100% yours

 • In some jurisdictions such as Florida, your residence is 100% exempt from judgment, whereas savings accounts and investments can be levied by judgment-creditors.

There is no right answer to your question. If paying off your mortgage sooner than later will provide a profound psychological benefit, then pay-off the mortgage as quickly as possible. If you are more comfortable carrying debt, then invest the $500 per month in a diversified portfolio and wait for the miracle of compound interest to work its magic.

I hope this information helps you Find. Learn & Save.