A couple with a $475,000 mortgage at 5% received $175,000 from a home sale and must choose between prepaying the loan or investing. Their $3,150 monthly payment consumes 37% of their $8,500 take-home pay, making payoff feel like relief. The mortgage rate is compared with risk-free yields such as 26-week and 52-week Treasury bills and the 10-year Treasury. The opportunity cost of prepayment is estimated as the gap between 5% and about 4.4%, reduced further by potential mortgage interest deductions. Investing is framed as preserving optionality and compounding, with an assumed 9% return generating monthly growth that can offset part of the payment. Liquidity is also emphasized because taxable brokerage assets are limited and needed for pre-59½ flexibility.
"“I would definitely not pay down the mortgage at 5%. The market's generally going to perform much better than that over time.”"
"“The gap between a guaranteed 5% ‘return’ from prepayment and a guaranteed 4.4% from a 10-year Treasury is roughly half a percentage point. That is the actual opportunity cost of paying off the loan early, and it shrinks further once you account for any mortgage interest deduction.”"
"“$175,000 invested at an assumed 9% annual return generates roughly $1,350 per month in growth. That is enough to cover a meaningful chunk of the $3,150 payment indirectly, while the principal keeps compounding. Prepay the mortgage, and you crystallize a 5% return forever. Invest it, and you keep optionality.”"
"“The couple's taxable brokerage holds only $30,000, what Robert calls ‘the bridge account’ for pre-59½ flexibili”"
#mortgage-payoff-vs-investing #opportunity-cost #treasury-yields #stock-market-returns #liquidity-planning
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