Every dollar of home equity earns a guaranteed return equal to your mortgage rate. If your rate is 6.5%, the equity in your home earns a risk-free 6.5% by avoiding future interest. That is a better guaranteed return than virtually any other low-risk investment available today.
The opportunity cost question is: what else could you do with that money? If you put $10,000 toward your mortgage, you earn a guaranteed 6.5% return. If you invest that $10,000 in the stock market, you might earn 10% or you might lose 20%. The risk-adjusted comparison matters more than the raw numbers.
A proper opportunity cost analysis considers risk, liquidity, time horizon, and your personal financial goals. The mathematically optimal choice is not always the right one for your life.
Patrick's Take
I look at opportunity cost this way: at 6.5%, my mortgage is the most expensive debt I have besides credit cards. Every extra dollar I put toward it earns a guaranteed 6.5%. Show me a risk-free investment paying 6.5% today and I will change my advice. Until then, paying down a 6.5% mortgage is one of the best guaranteed returns available. But do not neglect your retirement savings or emergency fund to do it. Balance is everything.
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Patrick Kevin Fagan
Loan Officer and Realtor, AXEN Realty LLC
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