After reading the related threads and doing a bit of thinking in evaluating my own mortgage options, I realized the discussion between ‘Should I invest or Pay off my mortgage faster” is dominated by two opposing camps: The “Invest! Interest rates are so low” folks and the “My home is not an investment, I want to eliminate this debt ASAP”. Neither of these two opinions are “wrong”, but in making my decision, I found it important to model both options and see under what circumstances either opinion is optimal, and by how much. Attached is a spreadsheet that will allow you to model using the same methodology I used. While I don't think this will rock anyone's world, I found it incredibly useful to think through my own options.

**Methodology**The attached worksheet considers 3 mortgage scenarios (a 30 year, 20 year, and 15 year option). For the 30-year and 20-year, two additional scenarios are modeled that pay additional principle each month. The additional principle is determined by comparing the required monthly payment vs. the borrower’s maximum monthly budget. The maximum monthly budget is comprised solely of mortgage payment and investment account. (Example: $4,000 monthly budget. In the prepay scenarios, all 4,000 is spent on the mortgage. In the non-prepay, the minimum required payment is spent on the mortgage, the rest is invested).

Each scenario is modeled over a 30 year (360 month) time horizon across multiple annual rates of return (-2% to 10%). Note that this rate should represent an inflation-adjusted, post-tax return. After 30 years, a “Return” is calculated, which is simply the projected investment portfolio value after 30 years. Keep in mind that all options contain the same paid-for house at the end of the 30 year horizon. The “optimal” approach is the mortgage option that produces the highest Return for a given rate of return scenario.

The attached workbook contains the model and allows the user to adjust assumptions by changing the yellow highlighted cells.

**Summary of Takeaways (mostly obvious)**- In a high investment return environment, it makes sense to stretch out your low rate mortgage as long as possible and invest the difference.
- In a low return environment, following the path of #1 will assuredly produce the worst outcome.
- The “lowest risk” strategy is to pursue the shortest mortgage you can afford (note this is distinctly different from prepaying your current mortgage as you lose out on the lower interest rates that come with shorter mortgages).
- The nominal benefit of choosing the “optimal” approach diminishes as the total mortgage/investment budget increases. (E.g. Given a $2,000 monthly mortgage, it’s more important for someone with only $2,500 to invest than someone with $6,000)

**Key Benefit of Model**At what rate of return does it make sense to prepay a mortgage or invest?

**“Realistic Environment” (using the data in the attached prepopulated spreadsheet)**For the main scenario I used in my decision process, I took the inflation adjusted returns (dividends reinvested) of the S&P 500 from 1950-present, which produces a return of 7.25%. I then took a haircut to reflect conservatism, investment fees, and taxes, producing a net return of 5%.

- In a 5% return environment, the worst option is to prepay a longer term mortgage. You are paying the highest interest rate on your mortgage AND sacrificing your investment account.
- The “best option”, is the 15 year mortgage – but some may understandably shy away from locking in the most expensive option
- Thus, the three remaining options (30 year, 20 year, and 20 year prepay) should be compared.
- Here, we see that the 20 year option generates the highest value, which prepaying the 20 year
**is worse than the 30-year option.** - It’s clear that if the interest rate of stock returns exceeds that of the mortgage note, it does not make sense to prepay
- While there are folks in the "hate debt" camp, this conclusion can at least help quantify what the prepay decision is costing you and you can ask yourself if it's worth it, now that a specific cost figure is known

**Conclusion**The options in this spreadsheet represent my current mortgage options, with ‘Option 1’ representing my current mortgage. Based on the results of this spreadsheet, I’m moving forward with the 20-year option as I think it is the best compromise between liquidity/diversification and return. While the 30-year option has the greatest potential, I don’t think the risk of being the “worst option” in low rate environments is worth it. Obviously folks with different views on risk/reward, the importance of liquidity, or the emotional gain from a paid off mortgage may come to a different conclusion. Hope some find this interesting (despite its length!)

**Endnote**Here's the final output for those that don't want to download the file.

Image reflects total budget of $2449 a month

*Edited the attachment and post to reflect corrections made to the methodology*