Quick Math Check on Paying off Mortgage vs. Investing

[BiggerFishToFI]

Taking on a new mortgage at an interest rate of 4.625% 30 yr fixed. Plan is to invest all excess money in a taxable account, then likely try to pay the house off at or before FIRE to reduce sequence of returns risk and our total expenses (P&I on the loan) by ~30%.

So if I can expect at least a 4.625% TOTAL return (including inflation) in the market it does it always make more sense to invest over paying down the mortgage? I do not expect to itemize my taxes with the current tax laws.

Assuming I can invest an extra $4k per month or put it toward the loan, and assuming a 7% total return. If I invest I will (might?) have enough to pay off the loan around September 2023. If I put it toward the mortgage instead I will pay it off GUARANTEED in November 2023 (2 months later).

If I decide to keep the loan for the entire term (and stop contributing to the investment account ~September 2023), in 30 years I end up with 1.6M -  466k = 1.13M more in future dollars.

So does the question come down to --> Do I want the loan paid off at FIRE (in 5-7 years) or do I want to service the loan for the next 30 years and most likely end up with more money? It seems if  I want it paid off at FIRE it might make more sense to take the "guaranteed" (barring income loss) payoff as opposed to rolling the dice to pay it off just two months earlier. Not to mention having to sell a big chunk of investments to do so and the extra taxes that may bring in.

What am I missing that sways this more one way or the other? Thanks!

Other notes: Mortgage balance is ~300k and am maxing out all tax-advantaged space

[One]

Sounds correct, you have to pay tax on the gains plus dividends on the investments but no tax on the pay down mortgage. I'd go with the %4.625 but I'm in the minority here. Could look at doing a combination of both. 

[moof]

...
So if I can expect at least a 4.625% TOTAL return (including inflation) in the market it does it always make more sense to invest over paying down the mortgage? I do not expect to itemize my taxes with the current tax laws.
...

Compare nominal to nominal, then adjust returns based on expected taxation of those last dollars in the two scenarios.
Will the interest be deductible now?  If so the effective interest rate is lower, in my case it is no longer deductible (itemizing now longer makes sense for our family).  Taxable accounts in retirement are likely going to be at 0% if total withdrawals stays below 100k for MFJ.
So in my case I compare 3% rate on my 12 years of remaining loan to rolling the dice over the next 12 years of the market for the remainder of my loan, and over that time span I chose taxable investments over mortgage.  I ran these through cfiresim.com to compare, and it was clear that my safe withdrawal rate excluding the extra mortgage withdrawals went up by paying the minimum on my mortgage and investing.  Your mileage may vary.

[steveo]

Sounds correct, you have to pay tax on the gains plus dividends on the investments but no tax on the pay down mortgage. I'd go with the %4.625 but I'm in the minority here. Could look at doing a combination of both.

I'd go with and went with the guaranteed 4-5% tax free returns. To me that is a no brainer.

[Scortius]

A few quick thoughts. Long-term stock return over decades is closer to 10% than 7% without inflation. On the other hand, you're talking about investing only until you have enough to pay it off in full, and then simply moving all the investments into the mortgage principal. This is generally not how it's recommended to be done, usually you are better off going all or nothing. I would recommend holding it the full 30 years, but if you really want to pay it off in 12, then you're probably just better off putting it into your principal directly. Note, this is of course as you mentioned only if you're already maxing out your tax-advantaged accounts (and I would still recommend just holding the mortgage for 30 years).

[BiggerFishToFI]

A few quick thoughts. Long-term stock return over decades is closer to 10% than 7% without inflation. On the other hand, you're talking about investing only until you have enough to pay it off in full, and then simply moving all the investments into the mortgage principal. This is generally not how it's recommended to be done, usually you are better off going all or nothing. I would recommend holding it the full 30 years, but if you really want to pay it off in 12, then you're probably just better off putting it into your principal directly. Note, this is of course as you mentioned only if you're already maxing out your tax-advantaged accounts (and I would still recommend just holding the mortgage for 30 years).

My thought of saving the money in investments until I have enough to pay it off in full is that I would have more liquid available in case of job loss or other emergency. Just paying extra on the mortgage every month does get me the guaranteed return, but obviously is not at all liquid.

I'm thinking about putting half toward the mortgage for the guaranteed return and the other half in taxable.

Anybody have thoughts on this? Invest then pay off in lump sum vs. extra principal payments with guaranteed 4.65% returns?

[talltexan]

Here's how I'd think about the problem:

suppose your mortgage balance is $300,000. I think that means your payments are about $1,540 per month at the mortgage rate you quoted us.

How much retirement wealth would you need to be able to count on having that income in perpetuity? Based on something like the 4% rule, you'd need approximately $462,000. If you have $462,000 sitting in a pile now, you'd put it into a taxable account and set up monthly withdrawals going straight to your mortgage (and you're done).

If you have less than $462,000, then do whatever it takes to build that up as quickly as possible (i.e. make minimum payments on the mortgage and put all the rest in VTSAX.

[NorCal]

From a finance theory standpoint, you are correct that 7% beats 4.x%.  The one factor you're not taking into consideration is risk.  Your mortgage paydown is a risk-free return, while the 7% is highly risky.

I also HATE the constant misconception that you should always assume 7%+ returns on the stock market going forward.  The statement "The stock market returns a 7% average return" and the statement "The stock market will return an average of 7% from today" are two VERY different statements that often get conflated.  Based on where valuations are today, I wouldn't expect 10 year returns anywhere near 7%.  I'm not one of those people that thinks the whole world is going to end, but I think 7% is way too optimistic from here.

Personally, I split the difference.  After maxing retirement accounts, I put half my excess cash flow to investing, and half to paying down the mortgage.  You'll only know which one will be better with the benefit of hindsight, so why not split the difference?

[dreadmoose]

I would lean hard towards saving the money until it at least matches the mortgage. You lose a ton of liquidity if you pay off your mortgage slowly and the math is hard leaning towards investing instead of paying down your mortgage at all, let alone slowly over time. That said I would also hold up to 5.5% for the entire loan term.

It gets tricky because it all comes down to your tolerance for maintaining debt, though that gets much easier when you have an account that has swelled enough to pay the mortgage off in one fell swoop.

Worst case you invest in the market, watch it not match historical averages for years but stay pretty even with your mortgage payoff situation and then make the call once you have enough saved.

There is hand-waiving distractions from both sides of the argument, but using historical averages and current mortgage rates the math says don't pre-pay your mortgage and you'll come out way way ahead while having tons more options through the life of your mortgage.

Also, I believe this is one scenario where half and half is much worse than going hard one way. The math leans one way and emotion leans the other, doing both over a long period of time will make the losing scenario seem foolish and could make you constantly question your decision (solving none of the emotion and losing on the math).

If you put all of your numbers in here I can try running a few scenarios to show you the magnitude of this decision. All hypotheticals can lead to one decision over another pretty easily (low actual mortgage vs high, capital gains tax rate).

[Telecaster]

My thought of saving the money in investments until I have enough to pay it off in full is that I would have more liquid available in case of job loss or other emergency. Just paying extra on the mortgage every month does get me the guaranteed return, but obviously is not at all liquid.

I'm thinking about putting half toward the mortgage for the guaranteed return and the other half in taxable.

Anybody have thoughts on this? Invest then pay off in lump sum vs. extra principal payments with guaranteed 4.65% returns?

A couple thoughts.   First--and this seems subtle, but it really isn't--is that you don't get a guaranteed "return" by paying down the mortgage.  What you are really getting is a future savings.  If you were getting an actual return, then you could become richer than Bill Gates by paying off your 23% credit card every month.     As a matter of shorthand, everyone says "return" and I often do too, but it is important to understand the difference.

Second, you are making the calculation wrong.  You have to compare apples to apples.   Nominal stock market returns are about 10%.   If you are going to adjust for inflation down to 7%, then you also need to adjust your mortgage cost down to about 1.5%.   Is a 1.5% "return" even worth your time?  As you correctly point out, in case of a job loss or other calamity (hate to use the word divorce, but divorces happen), the money is locked up in your house where it is expensive and difficult to access.   And again, you are locking up your money indefinitely for 1.5.%.   But even with the very conservative stock market returns you are using, you are still coming out a million bucks ahead.  That's real money.   Even if it is only half a million bucks ahead, that's still real money. 

Imagine if it wasn't a mortgage, it was some other investment.  We'll call it private shares in the Deadward Bones Company.  Here's the FAQ:

Q:   How long does it take for my shares to become fully vested in  Deadward Bones?

A:  30 years.  But if you pay extra, you get a bonus return of 4.5%. 

Q:  Bonus return?  Sounds great!  What is the standard return during that time?

A:  Nothing. 

Q:  But once I'm vested, it pays dividends, right?

A:  No.  You get nothing, other than you don't have continue making payments. 

Q:  You mean, once I'm fully vested those shares generate no return? 

A:  Correct.   

Q:  What if I want or need part of the money I've invested?   

A:  Too bad.  You can't get your money back unless you sell the entire investment and there are very high costs and commissions that go along with that.   However, you might be able to borrow against it.  But no guarantees on that one.   

Q:  What if I can't make the payments before I'm fully vested?  Like say in the event of disability or job loss? 

A:  We seize your assets, including most or even all of the extra payments you've made.  You are guaranteed of getting nothing, and you might even owe us.  That only thing that is is guaranteed is that this happens you will pay us enormous fees. 

Q:  Really?  You'd kick a guy when he's down like that?

A:  Damn straight. 

Q:  This sounds like the stupidest fucking investment I've ever heard of!  What kind of lunatic would even consider something so obviously nutso?

A:  You'd be surprised. 

 

[Telecaster]

From a finance theory standpoint, you are correct that 7% beats 4.x%.  The one factor you're not taking into consideration is risk.  Your mortgage paydown is a risk-free return, while the 7% is highly risky.

I also HATE the constant misconception that you should always assume 7%+ returns on the stock market going forward.  The statement "The stock market returns a 7% average return" and the statement "The stock market will return an average of 7% from today" are two VERY different statements that often get conflated.  Based on where valuations are today, I wouldn't expect 10 year returns anywhere near 7%.  I'm not one of those people that thinks the whole world is going to end, but I think 7% is way too optimistic from here.

Completely wrong.  Again, you must compare apples to apples.  If you adjust stock market returns for inflation, then you need to adjust the mortgage for inflation too.  The actual 30 year average is just a hair under 10%, not 7%.   

The other area where you need to compare apples to apples to is the analysis period.   If you compare paying off a 30-year mortgage with not paying off a 30 year mortgage, then your analysis period is 30 years.   

The definition of risk is "the chance of permanent loss of capital."   There has never been a 30 year period where the stock market with dividends reinvested has lost money, and 90% of 30 year periods it has returned greater than 6% (average and median are about 10%).    Could the future be worse than the past!  You bet!   But isn't likely?  Not at all. 

And let's talk about risk.  Putting huge amounts of money in a single, slowly (at best) appreciating asset is the poster child for risk.   Let's say a crack dealer moves next door and your home value goes to zero.  Or it turns out you live on a failing slope, undiscovered fault line, or bentonite soil?   Now what is the return on investment on all those extra house payments?   Are those things likely?  They have all happened more than times than the stock market losing money over 30 years.   

[One]

A few quick thoughts. Long-term stock return over decades is closer to 10% than 7% without inflation. On the other hand, you're talking about investing only until you have enough to pay it off in full, and then simply moving all the investments into the mortgage principal. This is generally not how it's recommended to be done, usually you are better off going all or nothing. I would recommend holding it the full 30 years, but if you really want to pay it off in 12, then you're probably just better off putting it into your principal directly. Note, this is of course as you mentioned only if you're already maxing out your tax-advantaged accounts (and I would still recommend just holding the mortgage for 30 years).

My thought of saving the money in investments until I have enough to pay it off in full is that I would have more liquid available in case of job loss or other emergency. Just paying extra on the mortgage every month does get me the guaranteed return, but obviously is not at all liquid.

I'm thinking about putting half toward the mortgage for the guaranteed return and the other half in taxable.

Anybody have thoughts on this? Invest then pay off in lump sum vs. extra principal payments with guaranteed 4.65% returns?

Yes, do this, 50% at fixed 4.65% and 50% in the market, the 50% in the market can go either way but will allow you to have an emergency fund and possibly more upside.  I would do 75% towards the mortgage at your interest rate.

[effigy98]

Personally, I split the difference.  After maxing retirement accounts, I put half my excess cash flow to investing, and half to paying down the mortgage.  You'll only know which one will be better with the benefit of hindsight, so why not split the difference?

That exactly what I did and the home is finally paid off. Having zero debt has lowered my stress level so much since my industry does massive layoffs and reorgs anytime the economy turns south which always correlates with my investments dropping by huge amounts.

[NorCal]

Completely wrong.  Again, you must compare apples to apples.  If you adjust stock market returns for inflation, then you need to adjust the mortgage for inflation too.  The actual 30 year average is just a hair under 10%, not 7%.   

The other area where you need to compare apples to apples to is the analysis period.   If you compare paying off a 30-year mortgage with not paying off a 30 year mortgage, then your analysis period is 30 years.   

Use 30 years if it suits you.  Sophisticated investors typically use a 10 year horizon to estimate return potential, as it is the time-frame where valuations are most predictive (roughly the business cycle).  30 year periods are typically useless for forecasting, as minor changes in unpredictable assumptions will dramatically change outcomes.

The definition of risk is "the chance of permanent loss of capital."   There has never been a 30 year period where the stock market with dividends reinvested has lost money, and 90% of 30 year periods it has returned greater than 6% (average and median are about 10%).    Could the future be worse than the past!  You bet!   But isn't likely?  Not at all. 

And let's talk about risk.  Putting huge amounts of money in a single, slowly (at best) appreciating asset is the poster child for risk.   Let's say a crack dealer moves next door and your home value goes to zero.  Or it turns out you live on a failing slope, undiscovered fault line, or bentonite soil?   Now what is the return on investment on all those extra house payments?   Are those things likely?  They have all happened more than times than the stock market losing money over 30 years.

In investment terms, risk is measured by volatility and correlation.  You add or remove risk by buying more or less volatile assets.  You also naturally de-risk a portfolio by buying investments with lower correlations.  One of the most important parts of measuring the risk of the portfolio is knowing the risk-free rate.  The OP has a risk free rate just shy of 5% (the mortgage rate).  Big portfolio managers have a risk free rate less than 1% (Treasury Bills).  Given the low spread between risky and risk-free rates the OP has, it's hard to imagine a scenario where putting at least some money toward the mortgage wouldn't be beneficial.

If you want to learn more about risk, read up on the Efficient Frontier.  It is one of the cornerstones of the Efficient Market Hypothesis.  This is the right way to compare the risk/return profile of various investments.

[Andy R]

You have to compare apples to apples.   Nominal stock market returns are about 10%. 

One does not get the "average" return of the past 100 years. They get one single instance of their period of time. Over 20 years, some people have gotten a 17% compounded annual return. Over other 20 year periods, people have gotten 2%.
Secondly, current inflation rates are around 2% and not looking to be picking up for quite a while. Not sure why you would use 3% just because they have gotten that on average in the past.
Thirdly we are in one of the longest bear markets in history. Even Vanguard thinks we are most likely to get around 3% real over the next decade.
Combine these and you are looking at around 5% nominal with very high risk to 4.65% guaranteed.

If that is not enough, throw in the fact that OP said they would like to retire in 5-7 years, and it doesn't even seem like there is a question here of what to go with.

The one caveat I might have is that if over there you have access to "offset" bank accounts where you can put money in there and have it offset the interest but still have access to take out the money, then I would put it into there and put some of it in the stock market if there is a huge drop.

[Telecaster]

Use 30 years if it suits you.  Sophisticated investors typically use a 10 year horizon to estimate return potential, as it is the time-frame where valuations are most predictive (roughly the business cycle).  30 year periods are typically useless for forecasting, as minor changes in unpredictable assumptions will dramatically change outcomes.

That's a bummer because almost everyone on this board including Mr. MMM himself make plans using the 4% Rule, which of course is based on a 30 year period.   

[MDM]

1) It's cheaper to pay down the mortgage if you're keeping taxable income lower than $77,201.

When comparing mortgage payment vs. investing (and ignoring psychological or risk pro/cons), money is best sent to the vehicle with the highest after-tax cost/return.

In other words, the lower the tax rate on investment returns, the more likely investing will be better than paying down the mortgage.

[MDM]

1) It's cheaper to pay down the mortgage if you're keeping taxable income lower than $77,201.

When comparing mortgage payment vs. investing (and ignoring psychological or risk pro/cons), money is best sent to the vehicle with the highest after-tax cost/return.

In other words, the lower the tax rate on investment returns, the more likely investing will be better than paying down the mortgage.

Oh yikes, realized I did not communicate well. I meant to say,  1) It's cheaper to pay down the mortgage when you're keeping taxable income lower than $77,201. I agree with you, 1000%.  I just suck at English.

If you mean that having a completely paid mortgage in retirement decreases the amount one might need to withdraw from a tIRA, thus possibly decreasing taxable income and taxes, yes we agree. :)

[clifp]

When comparing mortgage payment vs. investing (and ignoring psychological or risk pro/cons), money is best sent to the vehicle with the highest after-tax cost/return.

In other words, the lower the tax rate on investment returns, the more likely investing will be better than paying down the mortgage.

I don't think the importance of this can be overstated.  The decision to pay off a mortgage  is highly dependent on taxes.  I'd argue that there is no such thing as Quick Math check on it since its dependent on your tax situation, which means you pretty much have to sit down and do a rough estimate on the impact on your taxes both on the mortgage interest deduction and the taxes you'll pay on your investment.

So for example a $200K mortgage @4.5 may only generate a $1,000 in tax saving for single person and often zero for a couple due to the higher standard deduction. If you had that $200K in 50/50 portfolio. The $100k in a total bond fund would lucky to generate $3,000 in interest and would be subject to 25%+ (Federal + State income tax).  So it doesn't make sense to have a 4% after tax mortgage, while earning just over 2% after tax.  The  $100K in the total stock market fund is going to be taxed fairly lightly and while it is likely to earn more than 4% over an 5 or 10 year period it has to overcome  the drag of the heavily taxed fixed income portfolio. So paying off the mortage in this situation probably makes sense.

On the other hand, if you are high wage earner in an expensive, highly taxed state like CA it is very different.  A $600K mortgage @4.5% results in $27,000 in interest which could easily result in tax savings of $10,000.  Furthermore, if you are able to have your fixed income portion of your portfolio in your 401K?IRA then you have your investment in tax-efficient index fund.  Now you are borrowing money at less than 3% rates (27,000-10,000)/$600K  and the after tax return of an index fund is very likely to exceed the 3% cost of your mortgage.

[BiggerFishToFI]

Wow, thanks for all of your responses and debate! Sounds like I need to sharpen my pencil because clearly, this is not very cut and dry.

Here's my first crack at it with our actual numbers:

Total pretax annual income: ~$220,000 (This is somewhat conservative since there is a large bonus involved)
Total pretax deductions: ~$62,400 (401k, 403b, 457, HSA)
Total taxable income: $157,600 ($220k-62.4k)
Income after taxes: $118,200 (~25% effective)
Expenses: ~$50,000 (Including $1550/mo mortgage + taxes/insurance)
Money left over to invest in taxable or mortgage principle: $68,200 or $5683/mo
Marginal tax rate: 22-24%

$$ for FIRE while maintaining mortgage (using 4% rule): $1,250,000
$$ for FIRE with paid off mortgage (using 4% rule): $785,000

Current amount invested: ~200k
$$$ remaining on loan: ~304k @ 4.625%

Assuming 5% real return, 8% nominal over the next 10 years

Scenario 1: All extra money towards the mortgage ($5683/mo)
5 years, 9 months pay off time.
Another 6 months of work (or better market returns) should get us close to paid off mortgage FIRE target

Scenario 2: All extra money towards taxable investments ($5683/mo)
Projections show 6-7 years to FIRE target w/ out paid off mortgage

Both scenarios seem pretty even wrt time to FIRE. Much more liquid available if I go the taxable route but will pay less in taxes (dividends taxed at my marginal rate?) if I focus on the mortgage.

With the latest tax laws, I don't believe we will be itemizing. (14k in mortgage interest + ???)

So it comes down to the estimated difference in returns between the two. I would plan to keep bonds in my tax deferred accounts and VTSAX or simliar in the taxable. So even on a $300,000 taxable balance, I'm looking at ~2% dividends resulting in somewhere around $1500 / year in taxes at our marginal rate.

Now I'm just going cross-eyed and not even sure what I"m comparing anymore lol. Hopefully, some of these numbers will allow some of you to chime in with some more wisdom (and better math...).

One other question: One thing that is pointing me towards paying off the mortgage is it seems like a quicker path to FIRE, since the amount required to support a $1550/mo payment using the 4% rule $465,000 is significantly higher than the mortgage payoff amount of $304,000. I guess I am ignoring taxes here but still seems like the invested amount would be higher than the mortgage payoff amount? Is this logic sound?

Thanks again for all the responses! Seems like it will be a win-win situation whichever way I go but would like to optimize as much as possible

[MDM]

$$ for FIRE while maintaining mortgage (using 4% rule): $1,250,000
$$ for FIRE with paid off mortgage (using 4% rule): $785,000

$$$ remaining on loan: ~304k @ 4.625%

Assuming 5% real return, 8% nominal over the next 10 years

So it comes down to the estimated difference in returns between the two. I would plan to keep bonds in my tax deferred accounts and VTSAX or simliar in the taxable.

One other question: One thing that is pointing me towards paying off the mortgage is it seems like a quicker path to FIRE, since the amount required to support a $1550/mo payment using the 4% rule $465,000 is significantly higher than the mortgage payoff amount of $304,000.

For "$$ for FIRE," using $785K + $304K = $1,089K is probably most apt.  The mortgage payment does not increase with inflation, so it's not the same as a "normal" expense.

If you do have separate bond investments, comparing the mortgage interest to the bond interest is more correct than comparing the mortgage interest to stock returns.

[NorCal]

Wow, thanks for all of your responses and debate! Sounds like I need to sharpen my pencil because clearly, this is not very cut and dry.

Honestly, don't overthink it.  This is one of those things that people love to argue about on the internet based on their own firmly held convictions.  Myself included. 

In reality, which one is better is simply based on whichever investment will actually outperform along your investment horizon.  If returns in the stock market actually turn out better than your mortgage rate, the stock market is better.  If the stock market actually returns less than your mortgage rate, the mortgage paydown is better.  Good luck guessing which will be better in the future!  This is something people with phd's in finance and economics consistently fail to predict.

My prior long-winded post was simply my belief/argument that future stock returns will be lower than is generally assumed in this community. 

This is a good part of the reason I split the difference.  Both are good options, and the optimum solution is actually unknowable.

[seattlecyclone]

Personally, I split the difference.  After maxing retirement accounts, I put half my excess cash flow to investing, and half to paying down the mortgage.  You'll only know which one will be better with the benefit of hindsight, so why not split the difference?

Why not dollar-cost-average a lump sum of cash into the stock market? The logic in favor of doing this is based on the fact that the stock market could go up or down in the short term, and we don't know which one will happen in advance, so we might as well invest a bit now and a bit later just in case it goes down in between. The problem with this strategy is that a market increase and a market decrease are not equally likely events, so more often than not you'll do better by investing the full amount right away.

I think you can apply the same logic to this mortgage decision. The stock market might increase faster than 4.625% over the life of your mortgage, or it might not. We don't know which will happen, but we can examine data to try and deduce which outcome is more likely. Why not make a small bet on that outcome, rather than assuming each outcome is equally likely and allocating your capital accordingly?

[clifp]

With the latest tax laws, I don't believe we will be itemizing. (14k in mortgage interest + ???)

So it comes down to the estimated difference in returns between the two. I would plan to keep bonds in my tax deferred accounts and VTSAX or simliar in the taxable. So even on a $300,000 taxable balance, I'm looking at ~2% dividends resulting in somewhere around $1500 / year in taxes at our marginal rate.

Now I'm just going cross-eyed and not even sure what I"m comparing anymore lol. Hopefully, some of these numbers will allow some of you to chime in with some more wisdom (and better math...).

It sounds like even adding in property taxes and state taxes, and other stuff you won't be able to itemize of if you do you'll just be over the limit.

So based on this I'd pay off the mortgage.  Paying off the mortgage gives you a guaranteed 4.625% after-tax return.   The market return is variable, and while likely to be higher after a huge bull market less likely than was say 5 or 10 years ago.  This money will be taxed lightly initially, but actually, the taxes are more deferred than eliminated. Eventually, you'll sell VTSAX and have to pay capital gains taxes, the same thing with the bond interest in your 401K/IRA. If you are firing in 7-10 years the taxes due relatively soon. 

IMO if the after tax cost of the mortgage was <3% I definitely keep it, if the rate was over 5% I definitely pay it off. So you are the pickem range.  There is no clear right or wrong answer, and while the correct answer certainly could save you many thousands, so it's worth the thought you've put into, it is not so much money as to be life-changing.

There are also peace of mind issues, (stress of having mortgage payments in retirement) which don't matter to me but does to most people. Those also sway me to saying pay it off.

So pick one and don't beat yourself up if its the wrong one.

[Clamdigger]

House costs:
   Principal + interest + PMI + purchase costs + new appliances and furniture + property taxes + insurance + maintenance and repairs + improvements.

Cost offsets:
   Itemized tax deductions on interest and property taxes.

Paying off early:
    Reduces tax deductions on interest - reduces the cost offset.
    Reduces PMI paid.

House value increases over time.  Mine doubled in value over 20 years in MCOL area.  Taxes also doubled.

The intangibles of paying off early include less worry about losing your job, having no debt in retirement, less stress, and being able to put more money into improvements.

I built a new house in 1996 with a 30 year at 7% with PMI and 3% down, and I switched to 15 year at 5.5% five years later with no PMI due to increased valuation.  Switching to a 15 year loan was huge.  I can’t imagine still paying on my mortgage at my current age of 57.  You want to go into retirement with no debt, and you only have to pay for taxes, insurance, maintenance, and utilities.  You need to be able to live a frugal life in retirement.  You want to have your house paid off much earlier than you expect to retire.  If job loss is possible, having no house payment is huge.

[RWD]

The economists at Vanguard would disagree with you, they are projecting a range centered on 4%*.

Do you trust their projections enough to shift the majority of your equity investments into international funds (projected range centered on 6.5%)?

You suggest the analysis should be performed over a 30 year period. Again this is wrong, it should be performed over the period of time the debt WOULD be held. The average American only stays in a house for about seven years. If the OP would pay off the debt at FIRE anyways he should look at how long until he would FIRE. If he doesn't plan to may of the mortgage at FIRE he should perform the analysis over the time he plans to be in the house.

Agreed, I wish this was better understood. How long you plan to keep a property also affects calculations like whether you should go for a 15 year or 30 year fixed mortgage.

[Telecaster]

From a finance theory standpoint, you are correct that 7% beats 4.x%.  The one factor you're not taking into consideration is risk.  Your mortgage paydown is a risk-free return, while the 7% is highly risky.

I also HATE the constant misconception that you should always assume 7%+ returns on the stock market going forward.  The statement "The stock market returns a 7% average return" and the statement "The stock market will return an average of 7% from today" are two VERY different statements that often get conflated.  Based on where valuations are today, I wouldn't expect 10 year returns anywhere near 7%.  I'm not one of those people that thinks the whole world is going to end, but I think 7% is way too optimistic from here.

Completely wrong.  Again, you must compare apples to apples.  If you adjust stock market returns for inflation, then you need to adjust the mortgage for inflation too.  The actual 30 year average is just a hair under 10%, not 7%.   

The other area where you need to compare apples to apples to is the analysis period.   If you compare paying off a 30-year mortgage with not paying off a 30 year mortgage, then your analysis period is 30 years.   

The definition of risk is "the chance of permanent loss of capital."   There has never been a 30 year period where the stock market with dividends reinvested has lost money, and 90% of 30 year periods it has returned greater than 6% (average and median are about 10%).    Could the future be worse than the past!  You bet!   But isn't likely?  Not at all. 

And let's talk about risk.  Putting huge amounts of money in a single, slowly (at best) appreciating asset is the poster child for risk.   Let's say a crack dealer moves next door and your home value goes to zero.  Or it turns out you live on a failing slope, undiscovered fault line, or bentonite soil?   Now what is the return on investment on all those extra house payments?   Are those things likely?  They have all happened more than times than the stock market losing money over 30 years.

I wasn't going to comment but decided there were a few things that just couldn't go uncorrected.

The historical stock market rate of return is irreverent to the analysis. What matters is what the rate of return will be for the stock market over the Analysis Period. Are you projecting the stock market will return 10% over the Analysis Period? If so, why? The economists at Vanguard would disagree with you, they are projecting a range centered on 4%*.

You got the wrong guy.  The poster I was responding was the one who introduced the 10% returns, not me.  Or more accurately, he was using 7% real return, which is 10% nominal.   I simply pointed out that in order to make a meaningful comparison, you must either use real returns, or nominal returns, but you can't mix and match.   This is very common mistake.  People make it almost weekly, so it is important point out that it doesn't make sense to mix and match real and nominal returns so fewer people will continue to make that same mistake.

I have no problem with you using what ever number you like for your estimate of future stock market returns.  Use 2% if you like, that's fine me with.   Shoot, use -2%.  I recommend using historical return sequences, but again, you cannot mix and match nominal and real returns.  If you do, then your conclusions will be gibberish. 

You suggest the analysis should be performed over a 30 year period. Again this is wrong, it should be performed over the period of time the debt WOULD be held. The average American only stays in a house for about seven years. If the OP would pay off the debt at FIRE anyways he should look at how long until he would FIRE. If he doesn't plan to may of the mortgage at FIRE he should perform the analysis over the time he plans to be in the house.

Nope.  In fact, you are arguing against yourself.   If you move at seven years, you will be likely to either then 1)  Buy a house with a brand new 30-year mortgage, which case your timeline of holding a mortgage is now 37 years.   or 2) Pay cash. But that raises the question of whether it is better to pay cash, or have a mortgage.  The only way to answer that question is to compare what would have happen by holding a 30-year mortgage vs. not having the cash for 30 years.     

Even if he plans to die in the house, he needs to consider the position he would be in at one, two, three, four, five, six, seven, eight, nine, ten and ect years from now. I cannot overstate how long 30 years is. Many people on this forum were not alive 30 years ago. Plasma screen TV's and computer mouses had not yet been invented 30 years ago. We cannot teleport into the future 30 years and instantly begin to enjoy the benefits like you suggest. We have to consider the many things that could change during that period of time and the projected state of our finances during the duration. If you go broke in year four, you never get the never-have-been-negative-in-the-past-30-years stock market returns.

Scroll up to the very first thread stickied on this sub-forum.  It is called "Stop Worrying about the 4% Rule."   The 4% rule is based on 30 year periods.  The whole FIRE concept itself is based on 30-year projections.    Now, lots of people think the future will be worse than the past (many of them at Bogleheads).  But even then they are still basing their "worse" projections on what happened in historical 30 year periods. 

If we can't use 30 years as some sort of reasonable baseline, as you suggest, then all of our gooses are cooked.  And hey, if you want base your plans on four year periods, knock yourself out.  But the vast, vast, majority of people here are looking what is likely to be the case in 30+ years and making plans around that. 

[PizzaSteve]

...

Scroll up to the very first thread stickied on this sub-forum.  It is called "Stop Worrying about the 4% Rule."   The 4% rule is based on 30 year periods.  The whole FIRE concept itself is based on 30-year projections.    Now, lots of people think the future will be worse than the past (many of them at Bogleheads).  But even then they are still basing their "worse" projections on what happened in historical 30 year periods. 

If we can't use 30 years as some sort of reasonable baseline, as you suggest, then all of our gooses are cooked.  And hey, if you want base your plans on four year periods, knock yourself out.  But the vast, vast, majority of people here are looking what is likely to be the case in 30+ years and making plans around that.

This is not correct.  The concept of FIRE is retiring early based on achieving financial independence.  One can define their own personal version of what financial independence means, as well as when one wants to retire.

There are a number of studies useful in estimating what a reasonable sized portfolio is to retire on, assuming you use certain types of investments, and at what rate one can spend down that portfolio.  Calling those tools the "whole concept of FIRE" is missing the forest for the trees.

If I were to state core principles, I would advise:
*  Live below ones means while working
*  Save money to invest
*  Invest funds efficiently and wisely (avoid fees and excess expenses, if possible)
*  Build up non work income sources to fund your post FIRE cost of living (can be ETFs, funds, individual stocks, bond funds, individual bonds, CDs, rental property income, REITs, annuities, side hustles, inheritance, pensions, or a bunch of other stuff, not just stocks)

I would call these the fundamental principles, not the 30 years, 4% Trinity Study analysis, yada yada. Useful, sure, but not religious dogma.

I personally feel that some very early retirement folks over rely on stock return models to feel secure about their future plans, so some are a bit over eager to defend the anticipated benefits of debt leverage on home equity and stock return gains.  But each to their own. 

Those who dont want debt can also sometimes be defensive about it.  As stated, there is no pure mathematical, certain answer.  I base my own financial plan on a mix of income sources and cost savings decisions.