The Mathematical Reason for Paying Down a Mortgage Early

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?

The Mathematical Reason

In today’s market, where can you find a bond, Treasury bill, or certificate of deposit that matches the interest on your mortgage?

Where are You Investing Your Money?

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.


Guaranteed Return on Investment

Pay Down Your Mortgage Early Slowly

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.


Why Paying Down the Mortgage Early May Make Sense for You

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.


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