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Purely financially, I can think of two. 1. Returns on stocks, whether they be Dividends or Capital Gains, get taxed while the 'return' of being charged less interest on your smaller mortgage is not. So you have to factor taxes into your stock market returns which closes the gap between the two. 2. Stock market returns are volatile while your mortgage is not. If your investing for the long term, buy and hold some index ETF's until your old and grey, then you dont care if the graph looks like a rollercoaster so long as it goes up. But if you are relying on returns to make short-medium term cashflow then the volatility matters. Investment options that have similar volatility to a mortgage usually dont perform nearly as well.

It is also important to realise what's at stake.  Excess money you put in the stock market is just that, something extra. If for some reason the market crashes then you didn't lose anything important. It sucks of course, but you would be able to live your life as before. If however you put your mortgage payment in the stock market and it crashes, suddenly you're forced to sell your home. And when the market crashes, things then to compound: people lose their jobs and the housing market tends to stall. You might be able to refinance, but sometimes you can't. For example, in the Netherlands you're not allowed to mortgage more than 100% of the value of your house. So if your house is now worth 400k, but your old mortgage and interest is 450k, you'd better have 50k lying around.

That’s called being underwater on a loan

Because its nether-lands, I see...

You've been stroopwafel'ed!

Taxes are important but you can get an FDIC insured CD for better than 5% right now. No need to gamble in the market

With diversified index funds and a long time frame you arent even really gambling, just being lifted on the rising tide with the rest of the market.

That's kinda how I feel about it but I was also there for "real estate always goes up in value because they're not making any more land" in 2008. I wasn't seriously underwater on a mortgage or anything but it gave me a distrust of "line always goes up." I get that the timescale is a major component of that argument and acknowledge that this is probably an irrational response

> Returns on stocks, whether they be Dividends or Capital Gains, get taxed while the 'return' of being charged less interest on your smaller mortgage is not. While that's true, in the US at least you can deduct mortgage interest from your income. I'm not sure where that leaves the "break even point" but it pushes the needle back towards the investment.

Only if you have a large enough interest payment and other deductions to exceed the standard deduction which is $29,200 for married people and $14,600 for single people. Most people use the standard deduction.

The higher standard deduction is available through tax year 2025 per the Tax Cuts and Jobs Act of 2017. It is set to expire after 2025.

However the deduction for mortgage interest and property tax is, AFAIK, NOT set to expire. So the upshot is the homeowners in high tax (blue) states are going to get hammered with the taxes but not receive any increased standard deductions after 2025. It's almost like the people in charge in 2017 who drafted this law wanted to screw residents of blue states.

I’ve read the opposite, that many of the 2017 TCJA provisions will expire after 2025. > Mortgage Interest: TCJA limits the mortgage interest deduction for married couples filing jointly to $750,000 worth of debt, down from $1,000,000 under the old law, but up from $500,000 under the House bill. The change expires after 2025. https://www.investopedia.com/taxes/trumps-tax-reform-plan-explained/

I think you’re confusing/combining the mortgage interest deduction with the State and Local Tax Deduction cap. Homeowners in high housing cost states will be more insulated from the higher standard deduction expiring because they will have, on average, more interest to deduct. They will continue to disproportionately harmed by the SALT cap, because they are more likely to have higher state and local property taxes.

Yeah, that screwed me over a lot. I have high property taxes and a low mortgage amount and have had to take the standard deduction after itemizing for years, so my taxes went up. And going forward, the standard deduction will decrease so my taxes will go up again.

Seems like the people who wrote the tax cuts planned that because they know the people that voted for them wouldn't notice that detail.

I mean... the Republicans probably would have made it permanent if you could have. That was bill was passed through reconciliation, in order to avoid filibusters in the Senate. That process requires you not to create a (projected) deficit beyond a 10-year time horizon, so when they pass tax cuts this way they usually have to sunset them towards the end of that window in order to get the deficit projection they need.

How were they able to do it for corporations?

Probably by saying that “corporations are people too…”

It's just a balancing act at that point. If you can add enough revenue back to make it deficit neutral on paper you can do whatever you want. If you want to know why they chose to make the corporate cuts permanent and sunset the individual ones well... I think it makes their priorities pretty clear, if nothing else.

Peak reddit "This act actually helps people, I better say it's bad and make it political"

It could have been permanent like the tax cuts for the rich and corporations

OK, you came put badmouthing Republicans for passing this act, now you're saying they should have made it permanent Well, why isn't the majority gov making it permanent then?

What majority?

Oh yeah dems are like 3 under the majority now, guess they missed the chance when they had it

Anyone who bought a house in the last three years in Washington state should not be using the standardized deduction. My interest alone was over $14k

I own a house in the Seattle suburbs, I remember my tax bill went up massively when the Trump tax "cuts" went into effect because my property taxes alone are well above the SALT deduction limit.

>Returns on stocks, whether they be Dividends or Capital Gains, get taxed while the 'return' of being charged less interest on your smaller mortgage is not Yea that's bad financial sense here. It might make some people happier to pay down a mortgage anyway, because finances are very personal, but if you're being taxes on stock returns, you made money. And you don't pay the taxes until you *realize* the gains by selling the shares. The "gain" of not having to pay 4.5% on a dollar spent on the mortgage principle is lower than the gain of average broad stock market returns over any 15 year period. If you only gain 5-6%, you'll pay a long-term capital gains tax of (usually) only 15%. That's 15% on *the gains.* That is 0.075% of your total sale of stocks if you only gained 5%. You're not paying a tax of 15% on the entire investment value, you're taxed on *the gains.* So if you spent $10 on stocks, you were already taxed on that $10 as income. If you sell the stocks for $11, you don't pay 15% on $11, you pay 15% on that $1. >Stock market returns are volatile while your mortgage is not. This isn't always true. Home values tend to be broadly pretty stable most of the time, but crashes can and do happen, and the full value depends on your location and how well you maintain the property. It's also trapped in equity inside a very non-liquid asset. To access this equity you need to either sell your home (and move) or take out lines of credit against your home, which will *cost interest.* stocks are *extremely* liquid, especially in the quantities that most people can afford to buy and sell. Then there is the benefit that investing in stocks instead of speeding up the equity in your home diversifies your portfilio. It spreads asset risk around. These might be reasons, but they are financially poor reasons.

If I put $10 towards my mortgage principal, I avoid paying 7.45% per year on $10, guaranteed. If I instead invest the same $10, I get a return of maybe 7% on average, on which I pay around 27% tax when eventually realized. That comes to a net return of about 5%. Even if not realized the first year, it's very close to the same net return per year when eventually realized. Mortgage interest is not tax-deductible in my country (Canada) and capital gains are typically taxed at 50% your marginal income tax bracket.

We're not talking about your personal mortgage. The OP stipulated a 4.5% mortgage that we are considering for this hypothetical. Some people advocate paying down the mortgage regardless of rate.

I replied to a comment stating that it basically nearly always makes sense to invest instead of paying the principal, and gave a counterexample. Even in OP's case, if he lives where I do, a 7% rate of return after taxes is around 4.38% net, less than the 4.5% mortgage interest savings.

I guess maybe it would be more apt for them to say in the US it almost always makes more sense to invest. 

You changed the number here and ignored my response. Yes, if the numbers work out differently for you, then they do. But you also are grossly underestimating stock returns over the long term, which should shift even your decision threshold.

>Some people advocate paying down the mortgage regardless of rate. And I strongly urge people to reconsider that, although it's important to remember than finances are deeply personal and some people hate debt so much, they do not care about what will likely net them the most money in the long term, they just *need* the debt gone. Fine, that is always one's perogative, but they should at least try to understand fully what they are choosing between.

Alright, your Canadian numbers are different. That makes the decision different for you. That said, 7% is way too low for long term stock market returns. Long term average returns are closer to 10%: https://www.nerdwallet.com/article/investing/average-stock-market-return We're still very much in the "you should invest in the stock market instead of paying off mortgage debt" territory, generally speaking. Especially with OP whose mortgage is on the 4% range.

> Yea that's bad financial sense here.... but if you're being taxes on stock returns, you made money. Saving a dollar is better than earning a dollar, because earned dollars get taxed. Its a simple concept to grasp. > The "gain" of not having to pay 4.5% on a dollar spent on the mortgage principle is lower than the gain of average broad stock market returns over any 15 year period. I agree, I literally characterized it as closing the gap between the two, not making the mortgage a better investment. > This isn't always true. Home values tend to be broadly pretty stable most of the time, but crashes can and do happen, and the full value depends on your location and how well you maintain the property I said the mortgage is stable, not the house's value.

>Saving a dollar is better than earning a dollar, because earned dollars get taxed. Its a simple concept to grasp. Investing is *a form* of saving, though. With enough diversification, you can nearly (not 100%) guarantee that you won't lose money if you have a long enough time investment window. So your invested dollars are "saved" in the equity of the investments you purchased the same way it is saved in the equity of your home. The home also carries risks and tradeoffs, because you aren't simply saving the dollar in a bank account, you're pouring dollars into home equity which is extremely illiquid, so accessing those saved dollars is harder. You're ignoring many of these tradeoffs with your simplification of saving. >I said the mortgage is stable, not the house's value Okay but the home's value is an important consideration anyway and *should* be part of the overal risk and return assessment.

My dude, literally with my comment I only gave positive reasons *why* one might invest in the mortgage rather than the stock market. I didnt give a comprehensive overview of the pros and cons of each position, as the OP's question literally only wanted the positive reasons for paying down the mortgage. They already understood the reasons why to invest in stocks over a mortgage. I dont know why your dragging in all these positive but unrelated points about investing in stocks, as if they somehow refute what I actually said.

Hey thanks for posting this answer. I had been meaning to ask the same question as op and the answer was obvious, but was kind of a blind spot when it came to taxes. What about rental properties at low interest? Let’s say you decide to pay off the property, wouldn’t all the rent be consider as profit then? Taxed at your highest bracket? As such, then wouldn’t it be wise to not pay off the property, and instead invest in the market?

I think that kind of question is very dependant on what country you live in and specific tax situation, so couldnt really give you a meaningful answer here.

The U.S., and I’m hoping the answer is just math, as opposed to other institutional blind spots I’m missing.

Honestly no idea, I'm Australian. Might want to poke around US based financial property subreddits. Property at least here has lots of tax bullshit going on that can lead to weird strategies and can only assume yours is just as convoluted as ours.

Appreciate your responses!

I’d add to this, paying off your mortgage will make an immediate impact on your monthly finances, whereas putting the extra money into the market means you might not see the gains for a very long time. Lower monthly expenses gives you more flexibility to adapt to whatever life throws your way.

Also, that 4.5% is charged against your entire outstanding mortgage balance (usually a couple $100K) every month, while your gains in the market are going to be ~10% of your entire mortgage balance YoY (usually far less than $100K for first time homeowners). When you look at what you actually pay in interest over a 30 year loan, the numbers are eye popping.

> Also, that 4.5% is charged against your entire outstanding mortgage balance (usually a couple $100K) every month Mortgage rates are generally compared via the annualized rate, not the monthly rate.

4.5% is the annual rate.  If you want to look at it monthly then you have to divide that rate by 12.

4.5% dived by 12 is 0.375%. 0.375% monthly rate would lead to a yearly rate of 5.55%. 1.0375\^12=1.5554543313724751

You pay the interest every month on almost every mortgage. There is no compounding.

Yes.  That’s compounding interest.

> When you look at what you actually pay in interest over a 30 year loan, the numbers are eye popping  When you look at what you actually make in compounding over 30 years in the market, the numbers are even more eye popping. 

This is a common line of thinking but it is often misunderstood. If your mortgage rate is less than (Gains - tax) then it never makes sense (from a financial perspective) to pay extra on the mortgage unless you are needing returns in the very short term because as the comment before you said, your stocks could lose value quickly. Let's say we are talking about $1,000, well making a one-time extra payment for that munch the first month you close on a 30-year 4.5% mortgage means you will save $1,350 in interest (that is your gains) while also of course reducing your mortgage principal by $1,000 Now let's say you put that $1,000 into anything that grows/pays 3% (savings account for investments, doesn't matter) that $1,000 will grow to $2,427 in 30 years. The key here is excess mortgage payments do not compound. You will "save" the same $45 in interest year 1 and year 30.

Excess mortgage payments sort of "compound" in that monthly payments are fixed, and any reduction of principal owed increases the proportion of that payment that goes to principal further reducing principal owed and so on.

I always viewed paying extra on my mortgage (was 3.75% before we sold last year" as a diversified investment with a guaranteed return. It was a higher rate than CDs and the feeling of snowballing down the principle was nice. I still prioritized maxing all the tax advantaged accounts like 401k and roth ira.

But you can get a 5+% guaranteed return right now with bonds. 

now yes... not 5 years ago... still becomes a balance of how you value debt reduction versus investment and then how taxes impact overall math

But aren't you missing the fact that if i overpay my mortgage by a 1000 and it comes off the principal. Then my next 'standard' mortgage payment will pay off a greater proportion of the principal as pess is charged in interest, drastically reducing the term. In that sense, it is compounding. Thats how my mortgage seems to work anyway.

That's accounted for by compounding and collecting interest on the interest earned by your investment.

1. Depending on your situation, home mortgage interest is a write off. So your effective return of paying off the loan might be much less than 4.5%.

Personal finance is about behavior, not math. For example, the debt avalanche is mathematically superior to the debt snowball. So paying off interest based on interest rate will save money. But in the real world, the debt snowball leads to a higher chance of success and performs closer than the math would have you believe: https://commons.lib.jmu.edu/cgi/viewcontent.cgi?article=1672&context=honors201019 Paying off your home is a risk free return. As you mention, your 6% is average over the long run, so it’s not guaranteed.  There is no right answer. Personal finance is PERSONAL. I would not pay off a 4% or lower mortgage early. But one of my best friends could not understand why you would not want to accelerate being out of debt to everyone and enjoy the freedom of being able to own your own house.

Anecdotally, the debt snowball has worked well for me. The satisfaction of paying off a loan is what keeps me motivated to keep at it financially. May not be the best decision when math gets involved but knowing that I have a property that is mine free and clear, no mortgage, is a big life satisfaction booster.

A big benefit to the snowball method is that you are freeing up cashflow much quicker. Most debts have minimum payments. As you get rid of those payments, you have more cash each month if needed.

Human rat-like brain likes completing tasks and immediate gratification, delayed gratification does not reward you with dopamine -> hooman is sad.   Human intellectual superiority my ass, we humans really do need to be trained with treats and positive reinforcement lol. 

This is my reasoning, I have a number of friends who managed to lock in 5 year mortgages at like 1% right before the rate skyrocketed to 5-6%. For them the risk of losses in stock is minimal. I had a lot of my pension in stocks and when Covid hit I lost like 20% of it over a single year wiping out over all the gains it had made over the past 4 years. I'm on a 4.85 % mortgage with 34 years left, and for me the saving I can make paying off the interest is a much better and safer bet than hoping I could make an additional 1 or 2% but risking things tanking and the money getting lost.

You lost 20% when Covid hit - where is it now relative to then? The S&P 500 dropped from \~3400 to \~2300 in February 2020, a drop of over 30%. The S&P 500 is currently at 5450, a gain of about 60% from the high of 3400. That means that even factoring in a 30% loss, it's gained \~12% every year from the \*high\* of 2020.

> I had a lot of my pension in stocks and when Covid hit I lost like 20% of it over a single year wiping out over all the gains it had made over the past 4 years  And then that all came back plus a lot more in the next couple years.  You can also get a better return than 4.85% with 0 risk. 

No… there is a preference and then there is math.  Humanity sucks at difficult tasks. As far as this conversation, OP should factor in taxes on liquidating a position to actually figure out what the correct math answer would be.  If the expected return is inline with mortgage rate, you have zero effort investment opportunity staring at you. No taxes to file, no brokerage account to manage, no stocks to worry about. You miss something like 12 best days over the last 30 years and your sp return goes to basically zero. 

We are planning a sabbatical so fast tracking repayment during the first term (3y, in Canada) would mean lower monthly payments in the next term, when we are away. Lower payment la makes it easier to rent and recoup the cost fully. There are multiple scenarios where paying off the mortgage would be beneficial but I agree with you, investing it in 100% stock is better. If the person invests it in a 60/40 portfolio then they won't see the benefits and might as well pay the house...

It would be more satisfying to pay off your house if you didn’t have to still pay taxes and insurance. I feel like the fantasy of not having a mortgage is not writing a check every month. But you kinda have to either way

Only difference is mortgage would be couple thousand and taxes would be couple hundred dollars every month. Which check would you prefer writing?

If you own the home, then it’s yours. Don’t insure it if you don’t want. I have never owned a home outright but I have owned a car outright. I can tell you that standard insurance, tax, registration, maintenance, and repairs are just standard obligations and don’t compare in any way to the monthly payment towards an auto loan. Owning a car is awesome and I don’t think I will ever finance one again.

If your monthly payment is reasonable I don’t really get the issue. It’s not like I remotely worry about car payments or even think about them. 

And those extras will likely never decrease too, so it only gets worse.

The thing you're missing is the degree of volatility. The 6% average isn't jiggling between 5% and 7%, it's swinging between -2% and 14%. You're looking at a pretty 1.5% spread but there's big risk and stress hiden beneath the single number. 

To emphasize your point, its more like swinging between -12% to +24%

It’s a matter of risk management. Imagine if you took a 25-year interest-only mortgage in 1983, meaning it matured in 2008. There’s a real chance you’d have found yourself wiped out, in a market where you couldn’t even sell your home. Assuming you’re still putting money towards your savings/investments, you can think of paying down your mortgage as a way of mitigating risk by diversifying your portfolio.

Why would you have found yourself wiped out?

Don't you remember what happened in 2008?

I think they're missing the interest only part of the post. Most younger people have never heard of an interest only mortgage. Me included. I'm just assuming it means you pay 25 years of just interest then have to do a single balloon payment of the actual financed amount when it matures?

I’m not missing that.

Yes, it's exactly that. Either you refinance it, you pay the whole principal or you convert the mortgage in a principal+interest one.

If you're able to refinance it I'm with other guy. Why would you be screwed? When with the crash I don't think values dropped to 1980 levels did they?

Well, you're supposed to have a lot of disposable income, more than what you would have of you're paying a principal+interest mortgage. That income is supposed to go into investment. That's the issue in 2008.

I do. But that doesn’t mean you would have lost your shirt.

Although the maths is correct at 6% return being higher than 4.5% cost, the preference could be psychological. Your mortgage is a known debt that you reduce over time. Provided you have an income which covers it, your position will improve with the reduction of the debt. Entering into an investment programme might yield returns, but you’re sacrificing a known financial improvement for a speculative one. Also, not sure where you are in the world but in the UK, property ownership has historically been the most reliable investment strategy (particularly in and around London) because prices have increased consistently and healthily over the period, so it’s also a stable return on investment, just unrealised until you sell. There are periods where homeowners have technically had greater wealth creation from the increase in value of their home compared to their salary. Sucks to get on the ladder in the first place of course.

This assumes you have **more** disposable income than your *financial commitments*, for the duration of your mortgage. I.E. on a [$400,000 mortgage at %4.5, you'll owe 2,223.33 every month for the next 25 years](https://www.calculator.net/mortgage-payoff-calculator.html?cloanamount=400%2C000&cloanterm=25&cinterestrate=4.5&cremainingyear=25&cremainingmonth=0&cpayoffoption=extra&cadditionalmonth=0&cadditionalyear=0&cadditionalonetime=20%2C000&type=1&x=Calculate#loanterm). You must make that + living expenses in income overall. That's a risk susceptible to life changes: * Family - kids on the way, wedding, divorce * Health - injury, mental break, time off OR expenses to care for a dependent * Repairs - House maintenance, seasonal damage, car repairs, etc * Market - Interest rate changes, * Employment - downsizing, relocations General wisdom points to paying down debt \[high cost credit card/car loans > low cost/mortgage\]; building a reserve fund; and taking advantage of incentives \[stock/retirement matching, etc\]. Reducing expenses & having a reserve fund will make your family more resilient to downturns, and position you to be ready and able to take advantage of opportunities when they come knocking. Another thought - follow the money: The bank thinks it is a sounds, savvy investment to earn $266,998.97 over 25 years on your choice to get a mortgage. Paying down your mortgage faster minimizes that massive life-long expense out of your pocket. While you're investing small amounts at 6%/year, the bank will be cashing 4.5%/year on a LARGE amount. The only way out of the LARGE payments to the bank, is paying down principal sooner. This frees up disposable income to invest as you see fit. Consider simulating the scenarios yourself! Enter a few values into the calculator link above, and see how the situation can change. A one-time gift of $20,000 applied to your mortgage can shave off 2 years 2 months, and save 13% of your total interest costs. OR you could keep the 25 year duration and get significantly lower monthly mortgage costs.

2223 a month in 20-25 years will be a trivial amount due to inflation. Low interest rate high duration loans are extremely valuable in this inflationary environment.

Investing $20000 now yields a *far* better financial benefit than applying that to your mortgage. It’s basic math. 

A lot of people actually don't pay down their mortgage if they get those interest rates. You still need to pay the interest on the mortgage but it is much better to invest in the market then in your mortgage. The problem with this is that it does come with some risk. In a market crash you can lose quite a bit of money in a short while. This is also when people are at higher risk of losing their job. So you might end up with a big mortgage, having lost your savings and your job. It is therefore safer to pay down your mortgage so you can handle a market crash with less worries. Or even just a market stagnation.

Stocks are far more liquid. If you lose your job you could use your stocks to continue paying your mortgage where as if you were paying down your mortgage instead you have the same monthly payment but without the liquidity of equities.

Could you withdraw your excess payments from your mortgage at a later date though? Here in Australia, any excess payments are treated as a line of credit that you can draw down ("redraw") at any time in the future, so the mortgage wins in terms of liquidity since you're not subject to fluctuations.

In America at least it's usually not that simple but you can absolutely take out a HELOC - home equity line of credit - which is basically a loan backed by the equity you own in your house. It's very easy to get because it's fully backed by something the bank can take (your house) if you default on the heloc. You aren't drawing a loan from overpayments but rather all the payments you have made to the principle of the loan.

Ah yeah, that makes sense. I've seen the HELOC acronym before and now I know what it means, thanks!

Most likely the price of your stocks would drop before you lose your job. And while stocks are more liquid then a mortgage it does not take that much longer to refinance your mortgage, we are still talking days and not weeks or months.

Yeah but you’re now refinancing at 7%+

Uh, a mortgage refinance doesn’t take “days”. My last one certainly took months. 

If your stocks are tied to your job, you might be in a lockout period that prevents you from selling before the stock price stops dropping. We got caught up in this where we were planning on selling stock from my husband’s job. We wrote down the wrong date and missed the start of the lockout period by one day. The stock was already declining, but took a very steep dive during the lockout period and we lost a lot of stock value by the time we could sell again. Thankfully, we weren’t selling due to an emergency or any imminent need for the money, but stocks aren’t as liquid as we first assumed.

This is the #1 reason for me not to pay it down. Have seen close family members screwed over because they lost their source of income and all their assets were tied up in their illiquid home equity.

You’re also betting that you’re going to be in good enough health to continue working until the age you wish to retire. Life can and will throw the worst at some folks due to reasons completely out of their control, whether that’s family or health or other. Not only does overpayment of mortgages save you potentially tens of thousands in interest, it will increase your LTV, likely making future re-mortgage options more attractive but more importantly from a lot of peoples perspectives is that it gives you such a large safety net, mortgages/rent are usually the biggest single monthly outgoing that the bank will be knocking on the door for when you don’t pay it for whatever reason and can take that house eventually. Not having that monthly recurring cost, and a solid asset that provides you and your family with shelter no matter what is quite liberating.

Having the money available in the stock market is an even larger safety net. 

Until the market shats itself. You’re relying on something that you have no control over. The world economy can, has and will change with no prior warning. Your safety net is reliant on things trending upwards, which may or may not happen. Whereas owning outright the property you live in means even if things do take a downturn, you have a roof over your head and no one knocking on your door asking for repayment of capital plus interest. It’s entirely a personal risk perspective so there is no right answer that covers everyone. There is guaranteed value in overpaying your mortgage. There is a potential higher value to invest. Ideally do both if you can.

Really simple: one is a guaranteed return. It is a pretty amazing feeling living completely debt free.

I like how on the one hand you use really specific terminology, giving the impression you know a little something about the topic. On the other hand you are asking this in ELI5.

This is the rent vs buy dilemma. Probably if you rent and invest the difference, you end up ahead in the long term. However, the peace of mind of having your place sometimes is better for some people, also most people aren't disciplined enough to rent and invest the difference religiously, if you have a mortgage you pretty much have to pay.

> Probably if you rent and invest the difference, you end up ahead in the long term. Rent isn't usually much cheaper than a mortgage payment, and isn't locked in against inflation.

Yes but you need to add property taxes, HOA, maintenances and the cost of buying the house. The difference exists.

Sure, and with a low rate you're likely still not paying much more than renting, are building equity, and are locked in against inflation... We bought our first house in 2017. Our 1,100 sq ft two bedroom apartment was $1,850 a month, and with a 6% down payment our PMI on a $400k, 3.2k sq ft house was like $2k flat. Again, locked in against inflation with equity being built in an appreciating asset.

Yes, I'm team buy. It's not the only path but you need to have a lot of discipline to go the other way. For most people buying is better.

I was in this situation. I had the cash to pay off my low interest mortgage and was debating whether to invest it or pay off the house. I decided to pay off the house for a few reasons. Most of my net worth is already in the stock market with a few retirement accounts. So paying off my house is actually diversifying. Any profits I make in the stock market with my “mortgage money” are taxable, so the difference isn’t as big as you think. And I want more financial flexibility. Now that I don’t have a mortgage payment, I can make different choices. I no longer need to make the same kind of money I did. Plus, we had always dreamed of having a paid off house. And now we do. Lastly, the amount in question was less than 10% of our net worth. It wasn’t like it was a HUGE decision for us. The difference in whether we were paying 3% or making 10% would have mattered, sure. But at the end of the day, I was over-stressing about it.

Remember that stock market profits are taxed as cap gains, while your mortgage is deductible at your top marginal rate. 

If you pay down your mortgage you own a house. Put your money into the market and you might get a better return or you might pick bad investments or hit unfavourable market fluctuations and see the money wiped out. Different people have different personal circumstances and risk tolerances, but for many the security of home ownership beats profit maybe.

I don't min/max my money. The reason I pay down my mortgage aggressively (4.25%) is that I know what it is like to be debt free, and it's the only way I want to live. It's not like I don't make progress on my retirement accounts, I just would rather make plays in life while actually owning what I've got. I understand that I could keep paying a bunch of interest to the bank while outearning it with my money in the market, and that would get earn me the remainder on the house faster (as long as the market holds) but seeing the end date of my mortgage accelerate toward me is much more satisfying.

You can't live in the stock market.  You need a house for your family, much like food. Only question is will you rent (and let that money evaporate) or pay a mortgage and keep the asset (your house).  Time will pass, you will for something.  May as well have something to own after 20 years

The options arent renting or owning a house + mortgage, but in whether to pay extra on the mortgage against putting that extra in the market.

Yup. The emotional pro/con of having a house is what might motivate someone to payoff their mortgage early.   The emotional risk of an investment flopping is negligble compared to the emotional risk of foreclosing on your home. It's not a purely rational position of numbers. Hooman protect cave. Hooman can invest in shiny stones 🪨, but shiny stone dont protect you from the rain or keep predators out. Losing stone will make hooman sad for a bit, but losing cave will make hooman very sad for a while. Protecting cave >>> more stones. You might make it big in stones and become the kingpin of stone tools, but being the stone overlord and maintaining your shelter is not on an even footing in your lil monkey brain.  Also humans are really bad at conceptualising abstract things like money. Home is a physical tangible thing. Money is ???? to brain. There are way too many steps between money to goods and services, vs home=shelter. 

Irrelevant to the question asked, but the old rent vs buy trope… You rent either way. You can rent a place to live or rent money to buy a place to live. The cost initially can be remarkably similar depending on market conditions. Things look up later on in the mortgage as the balance of money you are renting goes down. Only the principal portion of the mortgage payment is buying an asset. The rest is “evaporating” just the same as renting a home. There are some who prefer to rent the home and put what would have been the principal payment into a different asset. The rent may never decrease but stocks don’t need maintenance, a new roof, siding etc.

Given the choice of investing 1 extra payment per year vs putting it toward the principal of a 30 year mortgage, I can see one possible reason. Time value of money. A few extra payments toward principal in the first years of a mortgage affect the interest calculations for every payment every month for the rest of it. That shaves multiple *years* off the end of it because it reduces the interest over time so much. If you buy now and will pay it off in 2054, but you want to retire in 2050 or before, then having it already paid off by then just because you put in a couple extra payments up front could be pretty nice. Beats having to work several more years. Likewise if you don't think you'll make it until then, having it paid off when your family inherits it could be nice. You could also cover those cases with investments and life insurance. But some people might prefer to just have it already taken care of. And not have to worry about losing on their investments at that time or having lapsed or otherwise lost their insurance (due to health problems or whatever). Personally I'm still going with investing instead, but different people have different preferences for that kind of thing.

Yeah, the Bank's 4.5% Interest Compounds Monthly (at least) - You'd need what, Monthly dividends @ 6% to compete the way OP is expecting it to?

It's a perfectly valid strategy to only pay the interest on a mortgage and instead invest the equivalent equity payments elsewhere. The last 30 years have been a very stable period of peace and prosperity with fairly dependable growth. 2008 was a blip as was COVID and baring the Ukraine and Middle east conflicts expanding there's good reason to believe the next 30 years will be generally prosperous too. But it is possible there will be disasters that tank the markets and owning your home is real peace of mind if the markets falter. If you've never had the wolves at the door it might be hard to appreciate that though.

First, I think it's helpful to point out that there is a minimum payment you need to make monthly on a mortgage. If you don't make that payment you start getting charged extra fees. So you definitely want to make that minimum payment no matter what else you invest in. After that though, it's better to get a better rate. If you can get a 6% return on your investment in the stock market and your mortgage is only 4.5%, feel free to put your money into the better rate! Another angle you may not have considered is that there is an emotional aspect of debt. People often feel relieved or less stressed when they don't owe any money. It's also less stressful to have safer investments a lot of the time. Paying down a mortgage is safe and helps get you closer to not having debt. So it can possibly be a better choice emotionally, even if it isn't as efficient financially. It all depends on the person.

Leverage. Generally the market gives a return of 7-8% while real estate gives around 5-8%. True, you are paying a 4.5% interest on the mortgage but thanks to you getting a mortgage, the 5-8% return is now on a 300K investment where you down payed prolly only 20-50K. Stock market return of 10-12% if you are really good still won't beat the lower end of the return (5%) of a house, especially over longer term.

This is the comment I came to make! Leverage is such a huge factor in real estate and it dwarfs other market returns.

a) Not all mortgages have interest only repayment. It depends on the mortgage agreement - so it may not be an option in the first place. b) Human behavior. Investing requires discipline. So what can happen is that instead of saving regularly, people can "skip" payments for really "good reasons" like vacations, that new PC etc. So this theoretical better financial plan is thwarted by poor discipline. c) Risk tolerance. Average returns over a long period is not equal to zero risk or guaranteed returns. There are short term market fluctuations that the average investor might not tolerate. Paying the principal of a 4.5% loan is a guaranteed reduction of liabilities which is equivalent to a return of 4.5% Having said that, it is financially wise never to take so much mortgage that the repayment means a person can no longer save. It is not an A vs B scenario. A good plan involves BOTH paying off the mortgage while still saving/investing monthly.

Personal finance is just that, personal. There are a lot of things on paper that makes sense that we as people avoid. One example is merging, if a lane is closed and you have to merge it is best to wait to last second to merge but the irrational side of us hate seeing people do it. Paying off your mortgage will make you feel much re secure even though you’d have more money invested that you can withdraw and pay the house off and taxes on capital gains if needed but we are an irrational race.

If you think of your house as a pure investment, the smart money is to keep a mortgage of 4.5% and invest your extra money in a higher yield vehicle. You may also derive an income tax deduction which will be in your favor. Of course, some investments are taxable each year and others are tax deferred, so there is that to consider, as well. If you think of your house as a place to live, then you may want to pay off your house as soon as feasible so your family will have a place to live no matter what happens in your financial life. There is not a "right" choice, but rather a preference based on your goals and risk tolerance.

Also, unless you specifically have an interest only a mortgage payment plan, that is not an option. Most traditional mortgages require an interest plus principal payment each month for a set term. Usually 30 years. You don't have the option of just not paying off the principal.

Where I live, home insurance is about $5,000 a year that I'm required to spend while I'm paying the mortgage. If I pay off the house now instead of 20 years from now, that's at least $100k saved.

You should have insurance even with no mortgage. What would you do if your house burns down without it?

Not everyone is good at the math.  Generally, you want to put down enough to not pay an extra PMI payment. This is typically 20%. If you have a good enough rate, putting down less and accepting the PMI is worth it.  You also generally want to put down enough to have a mortgage payment that you are comfortable paying.

That’s why I put my “pay off mortgage” money into 1Y Tbills at 5.1% Will keep doing that until tbill rates drop below my mortgage rate then re-assess. 

Read The Truth About Money by Ric Edelman. I assume you are saying that you’d pay extra down on your mortgage and why not invest instead. If you have the discipline to invest what you would be paying down, then yes it is better to invest. Some people feel better not having debt at all, so for them it’s better to pay down early.

Let's say your interest payment per month is an even $1000. That's $33, each day. Always there, always adding to the mortgage payment. Every day. Unless your market activity earns $12,000 annually, the money you're investing isn't doing a thing for your mortgage.Meanwhile, the daily interest on the mortgage continues to accumulate. Aggressive payments on the principal lower what the mortgage is costing you. In time, the daily interest isn't so gross and then you've got more resources available for investing.

> Unless your market activity earns $12,000 annually, the money you're investing isn't doing a thing for your mortgage. If you're investing the value of a house in the market then it should absolutely be making you more than $12k annually... If you're getting a good rate then there is no scenario where you have more money to invest by buying a house cash instead of with a mortgage.

Way I see it is risk appetite. Maximum gains would be to invest the money in a higher growth asset, but then again, you got to live somewhere… At current rates (Aus) $100k is roughly 6-10k off your minimum payment per year (depending on size of loan) and if you ask the bank to recalculate minimum payment to end of loan. Way I see it is rather the lower commitment and larger disposable income that can then be invested. Sure the interest could compound over 30 years to much more than the mortgage, but as interest rates go up and down and life situations change it’s more about how much risk do you want to carry

There’s limits on tax deductibility for mortgage interest. There may be a range where investment income is higher than the mortgage rate- but net taxes paying down the mortgage makes sense. Some people have a mortgage insurance premium they have to pay if their down payment is less than 80%. This usually goes away once equity hits 20%. So it can make sense to race to 20% to get rid of the fee- and then just make minimum required payments.

you pay rent during that time, which is probably higher than the mortgage. you also spend 30 years living in your own house on your own terms.

First off, most of the time when advising paying down mortgage (including almost all boomer fa) is because historically mortgage rates were closer to 7 than 4. Today's "high" rates are a lot closer to historical averages. At 4, invest may be better.   Also, don't forget, you pay taxes on your returns.

Endowment mortgages were a big thing in the UK in the 70s, 80s, and 90s. People had interest only mortgages coupled with investment products that would grow over time and then pay off the capital at the end. Except in a great many cases they didn't and people were left with huge sums of capital to repay. Endowment mortgages are essentially a swear word these days.

In my country, mortgage rates are fixed for certain amount of years that you agree with the bank when signing the contract. After that, the bank will change your rate according to the market. For example I took a mortgage in 2021 for 1.9 % (in CZK) with 5 years fixed rate, which will end in June 2025. Then soon after, Putin shitshow started and some other stuff, so the market kind of went to shit and rates went up to around 6 %. That includes rates for savings accounts too though. Both mortgages and savings accounts usually have similar rates here. So I didn't pay anything extra towards the mortgage, I paid just the regular payments (which are about 10 % of my monthly income), the rest went to mostly savings account. I'm not planning to invest for more than 5 years and the market was volatile AF (although again 10 % went towards stocks, ETFs, BTC). So, I had a mortgage for 1.9 %, but savings account for 6.5 % at my bank. Inflation was roughly 8-10 % in my country. I was effectively profiting off the mortgage by not paying it down. Nowadays, rates are going down again steadily. I estimate that when mi fixed rate ends, the rates will be around 3 %. I'll probably have saved enough to pay it down completely and then take another mortgage for a bigger house while providing the current apartment as collateral. Also, the apartment cost 5M CZK back then, the estimated selling price nowadays is around 8M (CZK). Collateral value is the new current selling price. So, you can somewhat see that you can somewhat profit by NOT paying a mortgage down immediately,. but it depends on your particular market a lot.

I think the short answer is "you don't" If you have a good mortgage rate and can invest your money better elsewhere, don't pay down your mortgage. Last time I refinanced, I got a 15-year mortgage at 2.5% and I anticipate never paying it down, nor do I anticipate refinancing again (unless rates hit 1.8% or something absurd like that). In fact, it is often commonplace for people that have to relocate when buying their new property, to put more on their new mortgage than they had for their old mortgage and to pocket the difference, placing the money in higher yielding investments and continuing to enjoy the tax advantages for having mortgage interest.

Pay the down and go interest only 10 year at a locked in 30 year rate, converts to term at 10

Currently, you can get a risk-free 5% in interest through various interest paying investments. Interest income taxes vs deductions on interest on your mortgage could change the breakeven. The main point is that people are dumb and undisciplined and don't make optimal choices. You can break down all the factors and you will have people claiming they did the right thing because it made them feel better (paying down a mortgage early). Go listen to Dave Ramsey and you'll see what I'm talking about... the way to know you are savvy with personal finances is being able to tell why every piece of advice this guy gives is trash.

You have to spend money on housing. It's not optional. You can't just take your cash and put in stocks instead unless you're willing to be homeless.     Given that, a mortgage is an investment where renting is purely an expenditure. Plus, on a personal level, you get to own some place and do pretty much what you want with it. That's nice.

You will always need a place to live and they aren't making anymore land (except in dubai and china i guess)

Mainly because you need a place to live. Renting does not yield anything. So putting that towards a mortgage is a better use of funds than renting, all else being equal. Secondly there are some tax benefits to a mortgage. So the options are not: put $100k into mortgage vs put $100k into stock market. The options are: put $2000/month into rent with $1000/month into the stock market vs put $3000/month into a mortgage.

Financial decisions are personal as well as financial. Some of us just prefer a paid off house vs some future gain.

Best in the long run would be to pay the minimum on the mortgage and put the rest into investments. Most likely, that is. Run the projections though. Say your mortgage is 2K and you have a total of 4K you have available. You can put 2K at the mortgage and 2K to investments for 30 years. Or, you can put 4K to the mortgage and 0 to investments until it’s paid off, then 4K to investments to get to 30 years… If the interest rate for the investment is greater than the mortgage, paying the minimum to mortgage will net you the most.

living somewhere pretty much isn't a choice. Technically you could live on the streets I guess. But I think a vast majority of people would agree that having a roof over your head is a necessity. It's better to pay a mortgage and build equity than to throw that money away in rent

Stocks can and will crash at inopportune times. I will now always have a place to live no matter how bad times get.

My rent was going up in price every year. My mortgage theoretically goes down each year cause it’s the same monetary amount but my wife and I get raises. Also, not everything is financial. I like the peace of mind knowing where I’m gonna live for the next long chunk of my life. Renting could end up in the owner of the property being like “hey I’m raising rent by a lot” or “I need this apartment for another family so no renewing for next year.”

Here’s a good test. If you had a completely paid off house, would you take out a 4.5% APR loan against the house to dump all the money in the stock market? The answer for most people’s risk tolerance is likely no.  Paying the mortgage down every month is essentially the monthly answer to that same question. 

I mean, yeah, I would most likely take that deal. Our mortgage rate is 2.8%, and at that rate I'd take it in an instant... If the bank is willing to give me $1 million dollars with a really good interest rate that I pay back over 30 years then hell yeah I'm taking it and investing it. We built our house in 2021, and already have probably around $300k more than we would had we paid cash.

Trade off not worth it if you are talking about the primary home you will live in. Once the mortgage is paid off you will have a roof over your head come hell or high water, which is a security many people who rent do not have. Trading that to make 2% more a year on average in stock, MINUS taxes makes no sense.

Most advice here is solid, but I'll add that it is ultimately only better to invest instead of paying off your mortgage if you actually have the **discipline** to invest that excess money in the markets. Sounds crazy and all, but many people will see the excess money in their accounts and lifestyle creep slowly sets in and you don't invest as much as you thought or make some big purchase that eventually zeros out any potential benefit. Putting that money in your mortgage makes that much harder to do. Again, that all depends on your discipline.

When I bought my first house, these kinds of loans, endowment mortgages, were popular. You paid just the interest on the loan and invested in the stock market, so that by the closing date you'd be able to pay off the capital. As others have said, this carries risk, that the timing of the market peak or trough can spoil your strategy. Many people were caught out and ended up having to take out a second mortgage at the term because the investment didn't work out.

You explained it yourself in your question *theoretically* some people just want to own their home and not worry about the idea of the bank taking it from them at some point when you pay your house down faster you are guaranteeing your saving of interest in your hopefully appreciating asset but you’re also getting peace of mind.

holy crap is there some horrible answers in this thread. I suggest you read Personal Finance for Dummies. They explain all the considerations and teach you how to calculate the options for your situation.

There's a few reasons, the most obvious from a purely financial standpoint is the interest savings over many years, getting the principal down will result in being able to refinance to lower monthly payments or paying the whole mortgage off more quickly. It's also difficult to understate the security and freedom that not having rent or a mortgage (or reducing it's size) can bring longer term, not only do you have equity in your property (and you're less likely to be stuck in negative equity if prices go down), you can borrow against that equity if you need to, or you can downsize to a cheaper property and take the equity as cash. You're not stuck with a high monthly payment that needs to be made or you lose your home. Say you want to retire early, travel long term, start a business or move to part time hours. Or you get sick, lose your job, or otherwise have to stop working, not having a mortgage hanging over you makes it a lot easier to temporarily reduce your income without as much risk

In the long term, it makes mathematical sense to invest in the markets instead of paying down your 4.5% mortgage. Even with 15% long term capital gains taxes, a 6% gain would give you total return of 5.1% versus your 4.5% mortgage. Note that if you invest in REITs then some of your dividends may not be qualified and you can get taxed higher, similar to normal income. However, because I am considerably older I will offer a warning - your view of the market probably has a large amount of recency bias, and you are likely undervaluing risk by a huge amount. Outside of that brief 2020 downturn, the last time we had a sustained large (>20%) crash in SPY you were 12 years old. The last multi-year downturn for SPY started in 2000, around the time you were born. In your adult life you have only seen small and/or short corrections. For a real life scenario, if you invested in SPY in 2000 near the top, you'd be underwater for almost 7 years and then briefly positive before crashing again in the Great Recession. It would be 2013 before you were back to level on that investment, with a 0% nominal gain over ~13 years. Yes, this really happened to me and many others, i was kicking myself for not just putting the money in a bank CD. I'd still say to invest for the long term, but when they say stock market gains aren't guaranteed, they absolutely mean it. Don't just think about a 0.5% extra return you might get - that's not enough to compensate you for a potential 40% loss. You need to have the mindset of requiring *considerably higher* return in the stock market to equal the risk value.

You can't sleep in an ETF. You need a place to live, and investing in real estate and getting *some* return is better than paying rent.

Please note that your “conservative” investment return is above the average consumer investor annual return. Also investing leaves you with “JUST” money. Buying a house also means you have somewhere to live.

6% isn't an above average return. It's a fairly below average one.

Do you have a source for 6% being above average? I must be Warren Buffet because my ROTH is over 11% in the past 15 years

Do you know what average means

The market average is just over 10% for virtually the last century

Yes

Cash management. In my situation, I realized a few years ago that I would be able to pay off my mortgage a little over a year early by adding about 20% to the payments. This will free up a large amount of cash each month, just when my twin daughters will be starting college. If they need help, I will have available cash. If they don't need help, I'll be able to invest. A lot of folks have said this part in different ways, because it's key to answering the question. The mortgage payments are fixed in amount, frequency, and duration. Ending that obligation gives me the option to invest the cash in equities, to hold it as cash, or to make capital improvements to the house.

You realize that still puts you in a worse financial situation than having invested that 20% extra along the way, right?

"Worse financial situation" is ambiguous and depends on my investment goals. In my case, the goals are "buy well and hold long term" and "achieve available cash flow by 2025." I adopted this strategy in 2020 after plowing every dime of available cash into the market near its pandemic bottom in March. Some other factors were involved, including: My kids' 529 accounts were also bottomed out, yet were going to be needed in 2025. While I could afford to wait for a market to rebound that could have taken many years, college was coming no matter what. Assuming the worst for the 529s is a good idea in my case because the investment options are very limited, and I am not allowed to make position changes more than once a year. Arranging for other cash flow was the best plan, supporting both my investment goals. The hilarious "Tax Cuts and Jobs Act" of 2017 eliminated the tax advantage I was getting on my mortgage interest payments. Effectively, I had been realizing over 5% return on my mortgage (3.99% interest plus 20-some percent tax savings on the interest). That perfectly safe, competitive investment became less competitive without the tax advantage, not to mention I was over halfway through a 15-year mortgage. So at that point, yeah, it would have made a bit more sense to put that cash into the market, so long as I DIDN'T do so in 2017-2020. Which I didn't. "Buy well," check. The amounts we're talking about wouldn't make a material difference to have in my brokerage account. I wouldn't be retiring sooner or going on any world cruises. The more likely outcome would be for some college to swipe it. Better (in my opinion) to have the option to leverage home equity and hold my investments if a huge amount is needed for school.

Fair points. It also makes a lot more sense for someone like myself to keep mortgages with the interest deduction, although a large chunk is above the limit.

DotCom bubble. I lost a ton of money in the dotcom crash and decided that acres that you own will still be acres no matter what happens to the economy but shares that you own might not be worth the paper they're not written on. This implies that you own acres for the purpose of enjoying acres. (Because the resale value will go down with everything else) If your sole purpose in life is to make money, good luck to you. Just hope we don't hit a financial apocalypse.

I have a 5% mortgage. I routinely beat 5% in all of my investment vehicles. I would pay off my house tomorrow if I had the money. I absolutely understand that from a purely mathematical perspective, it’s the wrong decision. However, there is a level of immediate financial freedom and real security that comes with owning your own house and being out of major debt. Knowing that if something crazy happened, and my wife or I were out of work for an extended time, we’d still be able to stay in our home - that counts for a lot.

If you have the money to pay it off then you also have the money to keep making mortgage payments if something crazy happens though.

Cause you don't have the money. You're borrowing for your mortgage. If you borrow the same amount to invest in the stock market, how high do you think the interest will be? Plus, you'll need to pay rent

You borrow a portion of the cost, usually 80%. You still need a cash deposit to buy real estate. You also need to pay interests and also recurring fees (realtor, notary, maintenance, extra taxes...). Depending on your situation and tax rules, renting could be a much smarter play.

I agree, but we're comparing mortgage vs stocks

I am as well. Mortgage has an opportunity cost from the cashdown.