It’s A Terrible Idea To Pay Off Your Mortgage Early


Father, techie, and money geek. Sometimes I write about personal finance.

7 Responses

  1. Steven James Saines says:

    OK, I finally read this. I could spend some more time thinking it through and studying your analysis, but I’ve always thought about this question in terms of: What is your mortgage interest rate? vs What is the average rate of return on a safe asset class (T-bills or maybe a broad index fund)? If your safe asset class has a higher interest rate, put your money there. If it’s less than your mortgage rate, then pay down your mortgage. I realize that’s looking at things in the short term, frequently, but is that analysis flawed?

    If you’ve made the case to yourself that you’d rather buy than rent, then including all those other expenses in your calculations doesn’t seem to make sense. You can set me straight when we see each other next month.


    • georgesaines says:

      I think that’s a fairly sound analysis. The only complication I’ve heard from other peers is the argument “well, if I’m debt free, look how much money I save per month!” which is partly why I wrote this. Because if you just look at it month-on-month and you do the responsible thing and not cash out your investments, it can easily seem as though paying down a mortgage makes sense.

      It’s more risky, so I’m not sure I would go so far as to advocate it, but I think it does make strict rational economic sense to even reverse mortgage a home when the spread between the mortgage rate and the market rate of return are wide and positive. I definitely feel a bit house poor at the moment because we have so much invested in our primary residence.

  2. Ryan says:

    I’m curious what you think of this when someone has a high mortgage rate. Thinking similar to Steven’s comment here, if your mortgage rate is 7% it’s hard to beat that post-tax return with most assets. It’s hard to think of it as “compounding” in the house though, is there something that makes investing still come out ahead even in situations like this?

    • georgesaines says:

      You can tweak the arithmetic a bit and include higher interest rates, but I suspect this will always come out in favor of loaning money due to the opportunity cost of money. Real estate as an asset class just doesn’t perform anywhere near as well over long stretches of time as public markets.

      So while there may be brief periods where interest rates are high that *seem* appealing, they actually aren’t because while rates are high, prices are falling. If you already own the home and have locked in a rate (even a high one), paying down the loan while prices fall due to high rates is the definition of good money chasing bad.

      But I’d be willing to concede this point if you can find evidence that yearly inflation-adjusted real estate price growth has outmatched public indexes like the S&P 500 for more than a couple of years here and there.

      • Ryan says:

        For the sake of this analysis I’m thinking of the appreciation on the house just keeping up with inflation, not earning me any money. Even in that scenario, with a 7% mortgage rate and a 5.35% return on T-bills, it seems like getting rid of your mortgage comes out ahead. Here is my scenario:

        I buy the extremely average house with 20% down at a 7% mortgage rate. My monthly principal + interest payment is $2206, and I have an extra $2000 I can put wherever I want every month.

        In one situation, I just invest the extra money in T-bills every month. After 30 years of compound interest at 5.35%, I end up with $1,693,767.82. Not bad!

        In the other situation, I pay off the mortgage as fast as possible. With an extra $2000 a month, it’s paid off in 9 years (from a mortgage calculator). For the remaining 21 years, I invest my $2000 plus the $2206 principal + interest payment that I’m saving in the same T-bills. At the end of all of this, I’m sitting with $1,964,288.55, a good bit more, even though the other scenario had 9 more years to compound!

        Now, there are a whole lot of variables that go into this. If I ever refinance below the super high 7% rate, or my investment returns are higher than what T-bills are going for now, or the house depreciates instead of just keeping up with inflation, investing comes out ahead. But it seems like for now, pumping money into the mortgage seems like the way to go, even discounting making any money from selling the house.

        Should mortgage rates go down significantly in the next decade, refinancing while taking some of the principal out to invest seems like a slam dunk. But that may be far out, and I’m trying to think of the best course of action in the meantime. I appreciate you getting so detailed with this – does what I’m laying out make sense?

  3. georgesaines says:

    Hey Ryan, those are good points. In my analysis, I have made the assumption that mortgage interest rates and the standard rates of market return wouldn’t stay out of sync for very long. But I agree that so long as the condition exists as you outlined, it probably does make sense to pay down the mortgage first.

    But that strategy implies that you would be willing to switch back in the other direction. IE, you put money into your mortgage while rates are high and T-bills pay less than your mortgage interest rate. But, when mortgage rates decline, you refinance and put that money towards the higher-grossing asset.

    I guess I should write a post at some point about whether mortgage rates have historically remained above the average rate of market return for very long.

    By the way, thanks so much for the in-depth and well-reasoned comment. I love debating this stuff with folks and I think you’ve got a good point here!

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