Should You Pay Down Your Mortgage or Invest?

People frequently ask me should I pay down my mortgage or invest the money instead? When you look at this question as purely a decision about the amount of money you can build in a long-term portfolio, the answer is easy . Based on current mortgage interest rates of 6% to 6.5% for a 30-year loan (as long as you have a good credit rating), investing the money in a stock growth portfolio that will net you about 8.25% after taxes (I'm assuming an 11% annual return and a 25% tax bracket) is the best bet.

Here's how you can compare apples to apples. Suppose you can get a 30-year, $200,000 mortgage loan at 6.25% and a 15-year, $200,000 mortgage loan at 6%. You'll usually find a lower interest rate on shorter-term mortgages. For the 30-year mortgage you'll pay $1,231.43 per month for principal and interest. During the 30-year period you will pay a total of $243,316.38 in interest. For the 15-year mortgage, you'll pay $1,687.71 in principal and interest. During the 15-year period you'll pay $103,788.46 in interest. Yes that's a huge interest savings of $139,527.92. But, there's an opportunity cost for saving that interest.

Suppose instead of choosing the 15-year mortgage, you choose the 30-year mortgage and save the payment difference in a stock growth portfolio that will net you about 8.25% after taxes. The payment for the 30 mortgage is $456.28 less than the payment for the 15-year mortgage. Investing $456.28 per month for 30 years into your stock portfolio would grow to $698,552.72. So as long as you can be disciplined enough to actually make that investment and manage it appropriately, it makes more sense to choose the 30-year mortgage.