There are few topics more hotly debated in personal finance than the age-old mortgage pay-down discussion. One side argues that you should never make extra payments on a mortgage. Instead, those additional funds should be invested in something with a higher return on investment.
I’d argue that paying off a mortgage early can make complete sense from mathematical and behavioral perspectives. This argument is tough to make in today’s unprecedented twelve-year bull market and historically low interest rates, but I’m going to give it a try anyway.
For someone that does not want to be an active investor in real estate or a business, where is the best place to put your money if you are looking for a safe, low-risk passive investment?
In today’s market, where can you find a bond, Treasury bill, or certificate of deposit that matches the interest on your mortgage?
Many have gone all-in with stocks without good alternative options out there for passive investing. While I’m a huge advocate for index fund investing, personally, we’ve never felt comfortable being 100% invested in index funds.
Paying down a mortgage is as close to a guaranteed return you can get today, and I’d argue that it’s the highest return you can get on your money at that low of a risk level.
Paying one extra payment per year, for example, can save you years off the back of your loan. That means if your mortgage is $1,200 annually, adding $100 to each payment can shorten your mortgage by several years.
The mathematical reason for paying down the mortgage is a balance of risk and return and not finding other low-risk assets that have higher returns than most mortgage interest rates.