We're 40 with $175K cash and a $475K mortgage at 5%. Should we pay it down or invest instead?

"“I would definitely not pay down the mortgage at 5%. The market's generally going to perform much better than that over time.” Robert Croak, Rich Habits Podcast"

"The answer comes down to one comparison: the after-tax cost of your debt versus the long-run expected return of what you would buy instead. Angela's mortgage costs 5%. The S&P 500 has returned about 27% over the past year and roughly 260% over the past decade. Long-run equity returns historically cluster around 9% to 10% nominal."

"Robert framed the break-even math cleanly: at an assumed 9% annual return, $175,000 generates roughly $1,350 per month in growth. That is enough to fund an extra mortgage payment every month, with the original $175,000 still working in the market. Paying down the mortgage instead gives Angela a guaranteed 5% return, but the cash is locked in the house and cannot be pulled out without selling or refinancing."

"The macro picture supports the call. The 10-year Treasury yields about 4.4%, so Angela's mortgage costs her only 58 basis points above the risk-free rate. Inflation, measured by core PCE, is running near the 90th percentile of the past year, which means every dollar of fixed-rate mortgage principal erodes in real terms while she holds it. A 5% mortgage in a 3% to 4% inflation world is cheap money."

Angela and her spouse received $175,000 in cash from a home sale and must decide whether to pay down a $475,000 mortgage at 5% or invest the money. The decision depends on comparing the after-tax cost of the mortgage with the long-run expected return of investments. A 5% mortgage provides a guaranteed 5% return if prepaid, but the cash becomes locked in the home. Long-run equity returns historically cluster around 9% to 10% nominal, and the S&P 500 has shown much higher recent performance. With inflation eroding fixed principal and the mortgage rate only slightly above Treasury yields, the mortgage is treated as cheap money. The recommendation is to invest rather than prepay.

Read at 24/7 Wall St.