This is an age-old question. Does it make more financial sense to pay off your mortgage quicker by increasing or adding payments, or to use that extra money and invest in an index fund in the stock market? The simple answer is to choose the option that leaves you with the most money down the road, and with low mortgage rates, the better choice is investing for the long term.
But that’s a simple answer to a complex question. There is a psychological aspect of money that differs for each person. Money isn’t all about math for most individuals. Some are good at separating emotion from money and treating their finances as a business with little emotional attachment, but that’s not common in my experience. For some people, eliminating debt is preferred over maximizing money. For one, less or no debt can reduce stress, which improves your health.
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Nevertheless, Ben Stein agrees with my opinion on the matter:
Generally speaking, if you have a very low mortgage rate, it is better to invest the money than to pay off your mortgage. It’s an interesting fact — the rate of return on your mortgage is the interest you’re paying on it. If you have a 6 percent mortgage and you’re paying it off, you’re earning 6 percent. If you can earn more than 6 percent in the stock market, you should probably put it in the stock market. But, on the other hand, pay it off in an expeditious way. It’s good to have it paid off, or at least mostly paid off, by retirement time.
This simplified answer doesn’t take into account the emotional side of money. Perhaps it shouldn’t, because facts are facts (unless they’re statistics). But it also doesn’t mention tax benefits of a mortgage for those who itemize their deductions (the home mortgage interest tax deduction) and it doesn’t take into account variations in stock market returns depending on your chosen investments and on market cycles.
His last point is the important one, I think. Once you retire and income presumably drops, you don’t want to have that much of a mortgage payment preventing you from using your money for other living or enjoyment expenses.
Updated October 15, 2015 and originally published June 18, 2007.