If you expect your investment returns to exceed your mortgage rate, investing is mathematically superior. The stock market has historically returned 7-10% annually over long periods. If your mortgage rate is 6.5%, the expected spread favors investing. But that is an average, not a guarantee. Some years the market is down 20%.
Paying down your mortgage is a guaranteed return equal to your interest rate. If your rate is 6.5%, every dollar you put toward principal earns a guaranteed, after-tax 6.5% return in the form of interest saved. No market risk, no volatility, no fees. That certainty has real value.
Your risk tolerance, time horizon, and overall financial situation determine the right answer. Many people choose to do both: invest for growth while making some extra principal payments.
Patrick's Take
This is the most common financial question I get. My answer: it depends on your risk tolerance. If the thought of the stock market dropping 20% keeps you up at night, pay down the mortgage. The guaranteed 6.5% return is fantastic in that case. If you have a high risk tolerance and a long time horizon, invest. Historically the market wins. But past performance does not guarantee future results. I see smart people on both sides of this debate. Do what lets you sleep well.
Patrick Kevin Fagan
Loan Officer and Realtor, AXEN Realty LLC
Deciding Between Investing and Paying Down Debt?
Patrick can help you think through the trade-offs for your specific financial situation.