MANAGE | JUL 1, 2021

Pay Off Mortgage or Invest?

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Rob West and Jim Henry

Whenever you come into “new” money, maybe from a raise or an inheritance, you have a decision to make. Do you use it to pay down your mortgage, or invest it?

Most folks probably lean toward investing those funds, thinking it always gives the better return. That seemed especially true over the last dozen years, with bull markets and low mortgage rates.

Still, analysts at decided to put that theory to the test. They compared mortgage rates with S&P 500 returns over a 43-year period. The findings showed that during certain times, paying down a mortgage actually gave better returns than investing in the market.

The span of time in the study was 1971 to 2013, and it revealed that paying down a mortgage, at any given year’s average interest rate, gave a better return than the S&P 500 in 26 of those 43 years, or about 60-percent of the time. The longer period of time you make extra mortgage payments, the more likely your return will beat the market.

But over shorter periods within that 43-year range … the market often wins. Take the last 10 years … the S&P 500’s average return of 14.3% is the clear winner over the average 30-year fixed mortgage rate of around 4.25%.

However, you would see quite the opposite if you look at the 10 years from 1997 to 2007. They saw the bubble burst and the lead-up to the Great Recession. In 10 out of 11 of those years, you’d have been better off paying down your mortgage than investing in the market.

Crunching the numbers further showed that in any 10-year span, paying down a mortgage beat the market 63% of the time.

Finally, there’s risk tolerance to consider. Investing in the market is often a rollercoaster ride and not the fun kind. If you can’t emotionally handle steep declines or your investment horizon is less than 5 years (10 is better), you shouldn’t be in the market.

Paying off your mortgage early may not be as thrilling as investing in Bitcoin, but on the plus side, there’s zero risk involved. You’re guaranteed a return equal to your mortgage interest rate and perhaps now a sense of relief that you’re probably not missing out on a bigger return somewhere else.

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