Should I Pay Off My Mortgage or Invest the Money?

Our analysis of historical returns over 43 years indicates mortgage pay down has won out more often.

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It's a question every savvy borrower thinks about: Should I pay off my mortgage and be done with it? Or should I take the mortgage company's money and try to get a better return in the stock market?

To answer that question, we analyzed historical mortgage rates as reported by Freddie Mac and the S&P 500 returns over a 43-year period. Our initial inclination was that the stock market would beat paying down your mortgage, but mortgage paydown proved a stronger contender than we expected. As an investor, what "wins" for you depends on your investment horizon and tax situation.

Historic Rates 1971 - 2013
Which Strategy won



A note about our analysis: We have performed this analysis to give insights into this question and made a number of assumptions along the way, which we call out. At the end of our article, we've outlined our analysis for review. Also, it bears saying: past performance is not necessarily indicative of the future. No one actually has a crystal ball.

Head-to-Head: 30-Year Fixed Wins More Often

An illustration of a young man with his pregnant wife standing between paying off their mortgage or invest their money.

For the 43 years starting in 1971 and ending in 2013, paying down a mortgage at that year's average mortgage rate was a better financial move than investing in the S&P 500 in 26 of those years or 60% of the time. Looking deeper into the results, if you had gotten a mortgage any time during or after the financial crisis (2008 through 2013), investing in stocks was a winning strategy. The S&P's compounded annual return over the five years following 2009, 15.29%, handily beat the average 30-year fixed rate of 5.04%. From 1997 to 2007, which includes the dot-com bubble and the lead-up to the financial crisis, paying down your mortgage was a winning strategy 10 out of 11 years.

5-YEAR S&P 500 RETURNS VERSUS 30-YEAR FIXED RATES
  • Winner
    Win Rate
  • 30-Year Fixed
    60% (26-17)

We were curious about longer periods of time invested in the stock market and re-ran the numbers, comparing the 30-year fixed to the 10-year S&P returns. For the 10-year return rate, the result is similar to the five-year period: paying down a mortgage was a better return than the stock market 63% of the time or 24 out of 38 years. Surprisingly, paying down your mortgage would have been a better use of your money than investing in the S&P 500, even for a 10-year period.

10-YEAR S&P 500 RETURNS VERSUS 30-YEAR FIXED RATES
  • Winner
    Win Rate
  • 30-Year Fixed
    63% (24-14)

For Most Americans, Including Taxes Favors Paying Down Mortgages

Our initial analysis above doesn't factor in the impact of taxes. A common argument about this type of analysis is the different tax treatment of stock returns and mortgage interest. Usually, you get more benefit from stocks, due to a lower tax rate for stock gains. However, recent changes in the tax code actually give an edge to the 30-year fixed for many Americans.

The Tax Cuts and Jobs Act of 2017 reduced the use of itemized deductions, such as mortgage interest, because the standard deduction increased. Now, 82% of homeowners have standard deductions large enough that the mortgage interest deduction isn’t providing a tax benefit to them. Those who do benefit from deducting mortgage interest have a tax bracket of 24%.

Stocks held longer than a year are subject to long-term capital gains taxes, which, for the majority of Americans, is 15%. Here’s how this might work out. Say that both mortgages and stocks have a rate of return of 10%. Tax affecting the mortgage rate at 24% would create a rate of return of 7.6% while the comparable stock return tax affected at 15% would be 8.5%.

We put together two scenarios to understand the impact of taxes. In the first scenario, we taxed only stock returns and did not factor in the benefits of deducting interest. In the second, tax is factored into both stock returns and mortgage interest. With the S&P trailing the 30-year fixed in our original scenario, it’s no surprise that lowering the returns on the S&P for taxes while leaving mortgage rates unchanged tips the scales further toward the 30-year fixed. When both strategies are tax affected, the results get closer to an even race, and the S&P forces a tie when reviewing 10-year returns.

5-YEAR S&P 500 RETURNS VERSUS 30-YEAR FIXED RATES

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  • Scenario
    Winner
    Win Rate
  • Head to Head (original)
    30-Year Fixed
    60% (26-17)
  • S&P 500 Tax Affected
    30-Year Fixed
    70% (30-13)
  • Both Tax Affected
    30-Year Fixed
    53% (23-20)
10-YEAR S&P 500 RETURNS VERSUS 30-YEAR FIXED RATES

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  • Scenario
    Winner
    Win Rate
  • Head to Head (No Adjustments)
    30-Year Fixed
    63% (24-14)
  • S&P 500 Tax Affected
    30-Year Fixed
    84% (32-6)
  • Both Tax Affected
    Tie
    50% (19-19)

But Aren't Retirement Accounts Tax-Exempt?

An illustration of a young family reviewing their 1040 tax form.

Retirement accounts such as the 401(k), Roth IRA, and Traditional IRA accounts are tax exempt while the money is invested, making them a great place to compound your money tax-free. If your investment goal is retirement accumulation, the tax treatment of retirement accounts is a reason to consider investing in the market rather than paying down your mortgage.

We're going to interrupt our analysis for a moment for a public service announcement. If your employer matches your contributions in a 401(k) or you're investing in another retirement plan that you have not maxed out, your choices are easy. Max out the matching plan first. By participating in your matching program, you'll achieve a 100% return ($1 becomes $2) even if you keep your dollars in cash. You’ll be beating both the stock market and whatever rate you have on your mortgage.

Now back to our regular analysis. Given that most homeowners will be taking the standard deduction, the scenario where the S&P 500 is in a tax-exempt account is actually our original scenario where neither is tax affected. For the relatively few people getting a tax benefit from mortgages, this is the scenario where the S&P 500 wins more often than paying down your mortgage.

Other Considerations for Your Situation

1

You have other higher interest rate debt

If you're carrying other high interest debt like credit cards, focus on these first. If you have an APR above 17 percent, paying down your credit card is a better return than both the S&P and your mortgage.

2

You are risk averse

You shouldn’t be investing in the stock market if you won't be able to stomach a sharp decline or your time horizon is so short that you won’t be able to recover. There are investment questionnaires online you can take or consult with a financial advisor to help you find a portfolio that will let you sleep at night.

3

You need cash or have a very short timeline

If you need cash or need to have a cash reserve for emergencies, neither the stock market nor your home equity is the place to do that. Selling your stocks in the event of an emergency may mean selling at a loss. Getting at the home equity that you’ve built by paying down your mortgage requires taking a home equity loan or, worse, selling your house — neither of these is ideal for accessing cash in a hurry.

4

You are eligible to refinance

Our analysis doesn’t consider the opportunities to refinance your mortgage along the way. Refinancing can have the benefit of lowering your monthly payment and reducing your total interest paid. This can be a great move for you financially if the interest rate drop covers your refinancing fees. Use the money you save on a refi on a monthly basis to fuel more saving. Even after a refi, you’re still able to pay down your mortgage if you feel that will give you a better return than elsewhere.

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Overall, Mortgage Payoff Has an Edge in These Scenarios

Looking back, we were surprised to learn that paying down your mortgage was a real contender, more so than we would have initially guessed. It was a real lesson in stock market volatility to see that the mortgage has outperformed over these time horizons (five and 10 years). Here’s the final scoreboard:

5-YEAR S&P RETURNS VERSUS 30-YEAR FIXED

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  • Scenario
    Winner
    Win Rate
  • Head to Head (original)
    30-Year Fixed
    60% (26-17)
  • S&P 500 Tax Affected
    30-Year Fixed
    70% (30-13)
  • Both Tax Affected
    30-Year Fixed
    53% (23-20)
  • Mortgage Tax Affected (S&P in retirement)
    S&P 500
    56% (24-19)
10-YEAR S&P RETURNS VERSUS 30-YEAR FIXED

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  • Scenario
    Winner
    Win Rate
  • Head to Head (No Adjustments)
    30-Year Fixed
    63% (24-14)
  • S&P 500 Tax Affected
    30-Year Fixed
    84% (32-6)
  • Both Tax Affected
    Tie
    50% (19-19)
  • Mortgage Tax Affected (S&P in retirement)
    S&P 500
    68% (26-12)

But You Should Diversify Between These Investing Choices

The reality is you should be pursuing both strategies with your extra cash. Picking the winner in a given year is hard or even impossible. With a win rate between 60 and 63% for mortgages, there's room for a longer period when stocks win for years in a row. In fact, we've been in one of those periods. Since 2001, both five-year and 10-year returns of the S&P have won more often than the 30-year fixed. Diversifying your portfolio with both investments decreases your risk profile. While the S&P moves through its ups and downs, paying down your mortgage (if it’s fixed rate) provides a guaranteed rate of return.

Here are the four steps the data tells us you should be taking.

1

Pay down high interest rate debt first

It’s a better return than either the market or your mortgage, and that extra cash is immediately available to you.

2

Max out any employer match

Assuming you have retirement to plan for, maxing out any employer match available to you will give you immediate 100 percent returns on your investment.

3

Look for opportunities to refi

In our mortgage trends analysis, we found that if you got a mortgage in January 2019 and refied in October 2019, you would have saved over $100 a month and recouped your refinancing fees in a couple of months.

4

Assess your goals and situation to choose the right mix for you

Short time horizons and lower risk tolerance should favor paying down your mortgage, especially if you’re not deducting your interest on your tax return. Longer time horizons in a tax-exempt account favor investing in the market.

Expert Insights

  1. Did the data from the above study surprise you? Why do you think paying down a mortgage outperformed the S&P 500?
  2. Many people do both: pay down their mortgage and invest in stocks, since it’s good to have liquid investments. Is there a rule of thumb? Would you devote 80% to the mortgage and 20% to the stock market?
  3. What do you think of real estate investment opportunities like Fundrise? Might they offer good returns, and could they be a good chance for those who aren't homeowners to see the same ROI as those with mortgages?
Scott Deacle
Scott Deacle

Associate Professor of Business and Economics and Department Chair at Ursinus College

Peter Zaleski
Peter Zaleski

Professor of Economics at Villanova University

 Thomas Kopelman
Thomas Kopelman

Financial Advisor at RLS Wealth Management

Thomas O’Connell
Thomas O’Connell

President of International Financial Advisory Group, Inc.

Dr. Brian J Adams
Dr. Brian J Adams

Associate Dean of Graduate Business Programs and Professor of Finance at the University of Portland's Pamplin School of Business

Todd Christensen, AFC, MIM
Todd Christensen, AFC, MIM

Founder of 50PlusOnFIRE LLC

Dr. Kimberly Goodwin
Dr. Kimberly Goodwin

Director of the School of Finance, the Parham Bridges Chair of Real Estate, and Professor of Finance at the University of Southern Mississippi

Michael Manahan
Michael Manahan

Lecturer at California State University, Dominguez Hills

Jesus M. Salas
Jesus M. Salas

Associate Professor at Lehigh University

Autumn Lax
Autumn Lax

Financial Advisor, CFP® at Drucker Wealth Management

Moshe Bellows
Moshe Bellows

Managing Principal of Maccabee Ventures

Dr. Benjamin A. Jansen
Dr. Benjamin A. Jansen

Assistant Professor at Middle Tennessee State University

Jesse Hurst
Jesse Hurst

CFP®, AIF®, Founder of Impel Wealth Management

Brian Hires
Brian Hires

Advisor on the Halls Dorn Team at Moneta

Yuval Dan Bar-Or, PhD
Yuval Dan Bar-Or, PhD

Associate Professor of Practice at Johns Hopkins University's Carey Business School

Taylor Jessee
Taylor Jessee

CFP® & CPA, Director of Financial Planning at Taylor Hoffman, Inc.

Michael Hakimi, CFP®
Michael Hakimi, CFP®

Founder of Black Dog Financial Planning

Steven Shagrin
Steven Shagrin

JD, Certified Money Coach/Master Money Coach & Trainer, Certified Professional Retirement Coach, Chartered Retirement Planning Counselor, Registered Life Planner, Former CFP®

Scott Butler
Scott Butler

Retirement Income Planner

Kenneth Romanowski, CFP®, CTFA
Kenneth Romanowski, CFP®, CTFA

Adjunct Faculty, Rosemont College and Semi-Retired Senior Financial Advisor

Nick Cantrell
Nick Cantrell

Founder, Wealth Advisor at Green Future Wealth Management

Dr. Tammie S. Lang, Ed.D
Dr. Tammie S. Lang, Ed.D

Program Director, Business Administration at Southeast Community College

Marguerita Cheng
Marguerita Cheng

Certified Financial Planner

Rockie Zeigler
Rockie Zeigler

CFP®, Host of Hey Peoria! Let's Talk Money Podcast

Analysis Assumptions & Notes

  • Basics of the analysis:
    We started with this premise: What if you financed a home in a given year and you had an extra dollar to spend? How should you use that extra money?


If you pay down the mortgage, you'll pay down the principal and get the benefit of avoided interest at the current 30-year fixed rate.

In the scenario of investing in the S&P 500, we used the next five or 10 years of compounded annual returns, assuming you would buy and hold for a period. For this reason, our analysis ends in 2013, the last year in which we have five years of returns to calculate (2018). We’ve ignored fees and commissions for both the mortgage and the S&P 500 as a simplifying assumption.
  • Mortgage interest tax benefit of 24%:
    Reviewing the 2018 tax return data from the IRS collected through July 2019, we found that over 50% of returns using the mortgage deduction were incomes between $75,000 and $200,000. We’ve assumed a 24% ordinary income tax rate for this group based on the current tax rates.
  • Paying down your mortgage is a guaranteed statement:
    Home equity is not guaranteed, however, your mortgage exists regardless of your equity. Each dollar that you pay down lowers the total interest paid on your mortgage and makes future mortgage payments reduce a larger percent of your loan principal.

Read More on Mortgages

About the Author


expert-profile

Doug Milnes is the head of marketing and communications at MoneyGeek. He has spent more than a decade in corporate finance performing valuations for Duff and Phelps and financial planning and analysis for various companies including OpenTable. He holds a master’s degree in Predictive Analytics (Data Science) from Northwestern University and is a CFA charter holder. Doug geeks out on building financial and predictive models and using data to make informed decisions.


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