Unfortunately after reading numerous articles on this topic, I have come away with 2 conclusions.

1) People who write black and white articles like this are pushing people towards more risky investments, and away from paying interest to banks. Most likely these people are financial advisers who want your money to invest, or they benefit from people paying the full interest $$$$$ for the life of their mortgage. This is sad, and when you see the black and white tones in an article, TAKE IT WITH A GRAIN OF SALT, they are probably just trying to keep you as an interest paying sheep.

2) You need to do your own research and crunch your own numbers. Many situations can be twisted and contorted with details left out so as to make their point valid. ALWAYS ALWAYS ALWAYS break down each point of each argument, especially in an article like this.

Thanks for reading that and replying.

Cheers!

You are right in suggesting that the choice is not between stocks vs mortgage. It is between extra mortgage payments versus whatever asset allocation is appropriate for you. The potential returns that you will plug into your model for analysis would correspond to your chosen asset allocation and not pure stocks (unless pure stocks is your allocation which it very well might be if you are young). I picked one example in the article, but of course every one will need to do the analysis based on their own situation.

I will leave you with this thought. Suppose you bought a house last year and were able to get a 4.5% fixed mortgage. Now suppose that 5 years later, US Treasury bonds are yielding 6% and the US is still considered an excellent credit risk. Would you not invest your extra savings in treasuries over paying the mortgage down since you are getting a iron clad guarantee of 1.5% better return in treasuries.

The reason I wrote this article is to hopefully encourage others to rationally look at the data before making this decision.
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For example: If you are buying $1,000 in money market/t-bills/cd’s per month. Stop, and start paying an extra grand on the homestead, instead.

That’s the comparison that should be made, not house vrs stocks.

1) Your house payment IS your *only* available investment money.

Sorry… dyslexic.

Let’s forget it is “interest savings” on a house for a moment and pretend that the savings are income.

So, can’t you apply your same argument to apply to telling people who are investing, that they should invest in high-risk/high reward (funds or stocks) over low risk/low reward (funds or stocks)?

That may not be good advice. But that isn’t what I see as the main cognitive flaw. I think the flaw is that you are presenting the house as a totality of the investment and comparing it to stocks as a totality of investment. When, in reality, we have a mix of low and high risk/reward investments. You are only comparing the house loan to stock investments, which should only be a PORTION of a person’s investment portfolio.

My argument is that paying off the house can be considered to be a PORTION of the pie chart, filling in the percentage a person wants as a low risk/low reward *certainty* in place of say a money market, CD’s, T-Bills, and so on.

What’s smart for one may not be smart for another, but…

Executive summary:

…what’s smart depends on an individual’s strategic risk categories and percentages, and NOT your argument’s forced BLACK/WHITE (stocks vrs. house) example. Unless of course someone wants 100% of their investments in growth stocks.

But, if your pie chart is one solid color labeled “growth stocks,” then, heck, by all means….

However, you *can* think of the early pay-off as a category of investment that you label “low risk” income.

To me your argument works only if two things are true. 1) Your house payment is not your *only* available investment money. 2) Your investment strategy is 100% stocks.

Yes? Or, am I full of it?

Mathmatically, a credit card with points would be a better way to pay for things than cash, but the average person saves 10 – 15% when they pay with cash. It doesn’t make sense, unless you agree there are a lot of emotions involved with money.

Sure, if you saved the exact same amount of money in both scenarios, you would do better with stocks. But I would never save as much as I am right now if it weren’t for the idea of paying off my mortgage (also contributing 15% to 401k), so I don’t have to die exhausted and bored in florida.

Regarding your comment on average 10% return over a 30 year period being an assumption, it is not. Historical returns are readily available for almost all stock indices in US and it would not be difficult to validate the figures. Alternatively, you may wish to click the link to the returns study cited in this article to look at the historical returns data. I will provide another link for you: http://www.finfacts.com/stockperf.htm. You will see that if you take ALL 30 year periods in the stock market for Dow Jones, and average the returns, this average is 11.83% in nominal terms. You will also see another interesting factoid, the average actually drops from 11.83% to 3.28% if you missed 90 best trading days in each span of 30- years. Which means, that over 72% of the returns in each span of 30 years were generated in only 90 individual days!

So first of all, your contention that 10% average over 30 years is an assumption is wrong. It is based in historical facts and is even a little bit more conservative than the reality. Now it is indeed an assumption that future will yield similar results compared to the past. No body knows. It may do better or worse. History suggests that stocks as an asset class have almost always done better than any other publicly investable asset class in the long run, and in absence of a crystal ball I would probably take my lessons from history.

Second, a 30 year average return indicates an average. Some stretches of 30 years do worse than the average, and some stretches of 30 years do better than the average. Besides, this only applies if you invest in stock only portfolio. If you are more conservative and invest a part of your portfolio in bonds or cash, than your returns will be lower than the long term stock returns and when “Your” expected investment return is lower, paying down mortgage may indeed make more sense.

I am really glad that your mortgage is close to being paid off. There are situations where I will advise people to pay off their mortgages first, specially if they are paying a high rate of interest on the mortgage and are unable to refinance at a rate lower than, say 7% or so. At a low enough mortgage rate, it does not make sense to pay down the mortgage early at all regardless of risk-tolerance as an investor, because you may be able to get better returns on treasuries. Take for example someone who gets a fixed mortgage this year at 4.5%. Sometime in the future when the economy is doing better and the interest rates have gone up to contain inflation, Treasury bonds may be yieding 6% which is a super safe guaranteed return (unless you believe that the US government will default). Would you advise that person to invest his excess cash in treasuries or would you advise him to keep paying down mortgage?

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