Paying Off your Mortgage-Is it Worthwhile?

Deciding whether to pay off your mortgage or pad your investment account isn't as simple as running a few calculations.

Big Mac or Jumbo Jack? Coke or Pepsi? Payoff house or fund your brokerage account? It's tough to decide how to deploy your cash. While choosing between making a mortgage payoff or an investment deposit may seem more serious than deciding what you want for lunch, both decisions boil down to personal preference.

Mortgage payoff calculations    

When you have $1,000 and you owe $1,000, common sense tells you to pay off your debt. The reasoning goes like this: you pay more to have $1,000 in debt than you can earn by having $1,000 in cash.

The calculation gets slightly more complicated, however, when the dollar amount is larger, and the two choices involve mortgage debt and a brokerage account. Depending on when you originated your mortgage loan, your interest rate could be as low as 5 percent. If you compare this to the commonly quoted long-term average stock market yield of approximately 9 percent, the mortgage payoff doesn't seem so advantageous.

This may be a fair conclusion, but the question is somewhat more complicated than a straight comparison of your mortgage interest rate to a 9 percent potential investment yield.

Investment returns, anybody's guess

First, it should be noted that a 9 percent long-term yield in the stock market is not a given. This figure is solely a pretax estimate based on history-and the number has been heavily debated. One Wharton School professor argues that the long-term real rate of return in the stock market is actually closer to 7 percent.  

Taxes also impact the net cost of your mortgage interest, as well as the net yield of your investment earnings. Therefore, to make a valid comparison of your options, you have to evaluate your after-tax mortgage rate relative to your projected, after-tax investment yield.

Home values and other factors   

The recent trend in home values adds another wrinkle to this analysis. It's true that a mortgage payoff will provide a lot of breathing room in your monthly budget, but what about longer term? The payoff house option requires you to tie up the bulk of your net worth in an asset that's illiquid and possibly declining in value. What would you do if you had to move, after you used all of your liquid cash to pay off your mortgage?

It boils down to this: paying off the mortgage saves you a measurable amount of money and may provide added peace of mind. But it may also leave you without liquidity. Padding your investment account, on the other hand, probably offers potentially higher returns-but no guarantees. You may end up losing money. This is a classic risk/return situation, and that's why your decision ultimately comes down to which option feels right for you.