Should you pay off your mortgage early?

The financial comparison is between the guaranteed return of prepaying, which equals your mortgage rate, and the expected return of investing that money instead. Paying down a 3 percent mortgage delivers a certain 3 percent, which is a poor trade against a diversified portfolio's long-run expected return, so the arithmetic favors investing. Paying down a 7 percent mortgage delivers a certain 7 percent with no volatility, which is competitive with equity returns on a risk-adjusted basis and clearly better than bonds. The crossover is somewhere in the middle and depends on your assumptions, your tax situation, and how much uncertainty you are willing to hold.

Several factors adjust the comparison. Mortgage interest is deductible only if you itemize, and since the standard deduction increase in 2017 the large majority of filers do not, which means most people receive no tax benefit and the effective rate is the stated rate. Investment returns in a taxable account are reduced by taxes, while in a tax-advantaged account they are not, so maxing an employer match and tax-advantaged space generally outranks prepayment regardless of rate. Liquidity matters: money paid into a mortgage is difficult to retrieve, requiring a refinance or home equity loan, and doing that when you actually need cash is when you are least likely to qualify.

The order of operations most planners endorse: capture any employer retirement match first, since that is an immediate guaranteed return no mortgage rate approaches, clear high-interest consumer debt, build an emergency fund, then weigh prepayment against additional investing based on your rate. Beyond the arithmetic, the psychological argument is real and should not be dismissed as irrational. Eliminating the largest fixed obligation in a household budget reduces the income required to survive a job loss and produces a security that people consistently report valuing more than the modeled dollar difference. Splitting the difference by investing while making modest extra principal payments is a defensible answer for anyone who finds both arguments persuasive.