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A Good Way To Look At The Paying Off Your Mortgage vs. Investing Debate

16 March 2010 10 Comments

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?


  • LeanLifeCoach said:

    As many times as I have heard Ramsey make his case, I've never been completely convinced. Yet, we have been accelerating payments to the mortgage.

    Turn it around though…. If you wouldn't borrow to invest then why not put your investments in your house? Would you sell out of the market completely if you could eliminate your mortgage?

  • 20smoney said:

    Ha, that's a valid point. I think the lesson here is to do both?

  • Michael61 said:

    I paid off my mortgage last year. It just feels sooo good to know I won't ever need to play that again. I also am continuing to auto-deposit the same amount of money I paid toward the mortgage into one of my investment accounts.

    I too enjoy listing to Dave. It does me good to hear his advice over and over again, not that I follow it 100% (I use a credit card, but responsibly). Too often listening reminds me of what could have been if I had screwed up.

  • Money Infant said:

    If you have a mortgage at 5% I can't see how it would possibly make sense to pay that off vs. investing in stocks. When you consider that you also get the tax write-off on the mortgage and you can buy good solid dividend bearing stocks that pay close to 5% and are likely to increase that dividend every year it's a no brainer. I think the major reason many favor paying off the mortgage first is the psychological benefit that you get once you're out from under the mortgage.

  • Evolution Of Wealth said:

    To me the biggest problem with this argument is "investing". I would never recommend money that is earmarked for paying off a mortgage to be put in the stock market. Once it's in the market it's not liquid and it's not safe. If the purpose of the money is to be there when you want to pay off your mortgage (whenever you choose to) then it needs to be liquid and not loose money.
    I also consider not paying down your mortgage as borrowing against your home and I'll do it all the time every time. I never plan to pay off a mortgage, I might someday but no time soon. That doesn't mean I would put that money anywhere near the stock market I'll do better in a lot safer places.

  • Money Reasons said:

    It took me a little over 10 years to pay off my house, but I wasn't ever totally convinced that what I was doing was the best thing. Unfortunately (or fortunately for me), the market took a bad turn in 2008, without my house valuations dropping much. So I got lucky.

    I have to admit, I do think about taking the equity in my house and investing or buying real estate. The main thing that stops me is the reduced living expenses I have by not having a house payment (having it paid off reduced my living expenses by 1/4 to 1/3), and the security for my family in case something happens to me.

    Here's a shocker, I've never read any of Dave Ramsey's books… It just seemed like the right path for me…

  • Petunia said:

    I am not a 20s, I am a divorced 40s who started over again. I am only 2 years into my 30 year mortgage. I prepay a bit, but not all that much. I think if you have a nice low fixed rate and you aren't maxing your Roth, it makes more sense to max the Roth. You deduct the interest you pay, your money will likely grow at a higher rate tax-free, and down the road if you choose you can withdraw a lump sum from your Roth to pay your mortgage in full, if you choose.

    That said, I intend to continue prepaying a bit while focusing on my Roth.

  • Accountants Sussex said:

    For me it is establishing a desired lifestyle, not the wealth for wealth's sake. To own your home is one thing, to spend your life in fear and poverty is another. Balancing your needs with a complete plan of what will assist you in becoming actualized as a successful person is a far better pursuit than buying up houses and stocks. This statement is not to indicate that buying stocks or adding to your investment through additional homes is not a positive activity but it must be a balance approach between living well and being greedy. If your lifestyle and enjoyment is derived from managing and monitoring your investments and this in fact is what increases your personal satisfaction then by all means apply yourself. Equally, though, is the need for people to respect different approaches to a sensible and contributing lifestyle.

  • shopping said:

    I think it depends,if you have the ability to win on stock market,then no problem,invest it there.

  • Trey Middleton said:

    Ok this one's simple…… when stocks are at low valuation, put the money into the market. When stocks are high, put the money in the mortgage….