Mortgage Payoff vs. Investing

The usual framing is "6.25% mortgage vs. the stock market's 10% historical return — obviously invest." Two things are wrong with it.

First, you are not comparing 6.25% to 10%. You are comparing a certain 6.25% to an uncertain average that includes years of −37%. Those are different products, and a risk-free return should not be compared to a risky one at face value.

Second, and more subtly: most comparisons forget the freed-up payment. If you pay the mortgage off six years early, you then have the entire payment — $2,662.87 a month — available to invest for those six years. Ignoring that makes the payoff strategy look far worse than it is.

So here is the comparison done properly.

Same person, same $400,000 mortgage at 6.25% over 30 years, same $200 a month of spare money. Two choices, both measured at the end of year 30.

Both end with the house free and clear. The only question is which portfolio is bigger.

Not "which is better," but: how confident are you of beating 6.25%, after tax, over your actual time horizon?

The case for investing

• Diversified equities have historically returned more than 6.25% over long periods.
• Tax-advantaged accounts improve the odds further — and 401(k)/IRA contribution room does not roll over, so an unused year is gone permanently.
• An employer match is an instant 50–100%. Nothing competes with that; capture it before considering anything else here.
• Investments stay liquid. Mortgage principal does not.
• Inflation quietly erodes a fixed-rate debt in your favour while you hold it.

The case for paying down

• The return is guaranteed. There is no sequence-of-returns risk, no bad decade, no panic-selling in a drawdown.
• The saving is not taxed. Interest you never pay is not income, so a 6.25% mortgage saving is equivalent to a higher pre-tax investment return in a taxable account.
• It reduces your required monthly cost of living, which shrinks the retirement savings you need.
• No fees, no expense ratios, no platform, no decisions.
• The psychological value of owing nothing is real and consistently underrated by spreadsheets.

Two adjustments are needed before comparing 6.25% to a market return honestly.

Your mortgage rate may be lower after tax. If you itemize, mortgage interest is deductible — at a 24% marginal rate, a 6.25% mortgage effectively costs about 4.75%, which lowers the hurdle investing has to clear. But around 90% of US filers take the standard deduction and get no marginal benefit at all. Check before assuming this applies to you.

Your investment return may be lower after tax too. In a taxable brokerage account, dividends and capital gains are taxed. A 7% nominal return might be nearer 6% after tax — which erases most of investing's apparent edge at these rates. In a Roth or traditional 401(k), it is not, which is much of why tax-advantaged space matters so much here.

Three things that matter as much as the arithmetic:

Sequence risk

The table assumes a smooth annual return. Real markets do not deliver that. Two portfolios with the same 30-year average can end very differently depending on when the bad years arrive. The payoff strategy has no equivalent risk — 6.25% saved is 6.25% saved, every month.

Behaviour

The investing strategy only wins if you actually keep investing through a 35% drawdown. Many people do not. An automatic extra mortgage payment requires no conviction during a crash. If you know you would sell at the bottom, the guaranteed option may genuinely suit you better than its expected return suggests.

Liquidity

This one favours investing clearly. A brokerage account can be sold in a day. Mortgage principal cannot be withdrawn at all — you must sell the house or borrow it back, and a lender is least likely to lend precisely when you most need it. This is why an emergency fund must come before either strategy.

Before the payoff-versus-investing question is even live, three things outrank both:

1. 3–6 months of expenses in cash. Neither strategy helps in a job loss.
2. Any debt above roughly 8%. Paying off 22% credit card debt beats both by a wide margin.
3. Your full employer match. An instant 50% return is not something either option can approach.

A surprising share of "should I pay off my mortgage or invest" questions are answered entirely by this list.

The break-even table shows the two extremes, but the choice is not binary. Splitting $400 a month between extra principal and investments captures a guaranteed return on half and market exposure on the other half, and hedges the possibility that you are wrong about which side of 6.20% the next 30 years land on.

Given that nobody knows the future return of the market and everybody knows their mortgage rate exactly, hedging is a defensible answer rather than an indecisive one.