A Good Way To Look At The Paying Off Your Mortgage vs. Investing Debate
The following question has been debated for years: What you should do with your money? Work on paying off your mortgage or invest the money in stocks? Most people go the stocks route since the mortgage rates these days are so low, and people are still buy into the mentality that over time stocks will always bring a nice return.
I was listening to Dave Ramsey the other day and he actually made some pretty interesting points about this whole debate. They are:
- If your home were paid off, would you borrow against it to invest in the stock market? Almost all people would undoubtedly say no to this question, yet it’s essentially the same thing as paying off your mortgage vs buying stocks. If you answer no to the question, then you should still attempt to pay off your mortgage versus buying more stocks.
- After doing financial counseling for decades, Ramsey believes that people who pay off their mortgage actually end up wealthier in the long run even despite potential greater returns in stocks. The reason for this is that by having their residence paid off, these people are pushed to make continuous sound financial decisions and also take other risks in the area of careers and business. These actions tend to result in greater wealth down the road.
- Ramsey said 100 out of 100 times he would recommend people to pay off their mortgage before investing that money in the stock market. A pretty convincing argument!
So, I think Ramsey makes some pretty good points here. The common arguments against this approach are that people like to have a cash reserve available or the liquidity of stocks (to access the cash if they need it) and it’s dumb to pay down a 30 year loan at 5% because you can easily make more than 5% on your money.
My two arguments against these common points are that you shouldn’t pay off your mortgage if you dont have a cash reserve. Ramsey wouldn’t advise this if you look at his “baby steps” plan. To the second point, the idea of long term guaranteed returns in stocks is way overplayed in my opinion and there are bigger advantages than just the guaranteed return of paying off your mortgage (emotional satisfaction, great sense of stability, guaranteed financial returns, your risks are much lower if you’re unemployed, etc.).
So, what say you on this question of paying off the mortgage vs investing in stocks? Does Ramsey’s points above change your mind at all?