Should you invest more or pay down the mortgage?

The napkin math seems simple enough. Over the last 30 years…

  • the S&P 500 averaged an annual return of 10.7%

  • U.S. mortgage rates fell from 8% to less than 3%

Yet, an entire industry gets it wrong.

 

You’d be mistaken to believe these numbers suggest a simple arbitrage play.

We ran the numbers.

 

Here’s what we found:

  • The math behind this classic tradeoff is much trickier than it seems

  • For U.S. equity investors over the prior 30 years, there was little to no difference between paying off your mortgage over a 15- or 30-year time period

  • Any cost or benefit for this tradeoff was just as likely to come from tax benefits as it was from investment arbitrage economics

  • Stock market volatility, leverage, and timing (luck) are essential to the economics

  • The decision on whether or not to prepay a mortgage might be better served by factors other than perceived arbitrage opportunities (e.g., risk aversion, personality, personal goals, unusual tax implications)