The Real Tradeoff Between Paying Off Your Mortgage vs Investing
This question comes up constantly:
“Should we pay off the mortgage, or invest the money instead?”
Most answers online are simplistic.
If your rate is low, invest.
If your rate is high, pay it off.
That framing misses the real tradeoff.
For higher net worth households, the decision is not just about interest rates.
It is about structure, risk, taxes, and psychology.
Here is how I actually evaluate it.
1. The Mathematical Spread
Start with the obvious.
If your mortgage rate is 3 percent and your long-term expected portfolio return is 6 to 7 percent, the math favors investing.
But that spread is not guaranteed.
The mortgage is a known cost.
Investment returns are variable.
The question becomes:
Are you comfortable with volatility in exchange for expected excess return?
Affluent households often can tolerate that volatility because their overall balance sheet is strong.
But math alone is incomplete.
2. Liquidity vs Permanence
When you invest excess capital, it remains liquid.
When you pay down your mortgage, that capital becomes illiquid home equity.
In Grosse Pointe, where primary residences can represent a large portion of net worth, this matters.
Liquidity provides:
Flexibility during downturns
Opportunity capital
Estate transfer simplicity
Paying off a mortgage increases net worth on paper.
It does not increase optionality.
That tradeoff is often overlooked.
3. Sequence Risk in Retirement
This is where it becomes more nuanced.
If a retiree is drawing 5 percent from a portfolio and also carrying a mortgage, the payment increases required withdrawals.
Higher withdrawals increase sequence risk.
In early retirement, reducing fixed expenses can materially improve sustainability.
In that case, paying off a mortgage is not about return comparison.
It is about reducing required income.
That can strengthen guardrail flexibility.
4. Tax Reality
Mortgage interest may or may not be deductible depending on:
Loan size
Itemization status
SALT limitations
Investment gains are taxable.
If your expected return is 7 percent but you net 5 percent after tax, the spread versus a 4.5 percent mortgage shrinks.
The decision must be evaluated after tax, not pre-tax.
5. Psychological Return
This part rarely shows up in spreadsheets.
Some clients sleep better with no mortgage.
That has value.
Others are comfortable carrying low-cost debt while their capital compounds.
There is no universal personality profile.
But ignoring psychological comfort in favor of theoretical optimization often leads to regret.
6. Estate Considerations
From a legacy standpoint, invested assets are flexible.
They can be:
Transferred
Gifting vehicles
Donor-advised fund assets
Trust-funded
Home equity is less flexible and more complex to divide among heirs.
In multi-property households common in this area, liquidity simplifies estate administration.
The Real Tradeoff
This is not:
Interest rate vs expected return.
It is:
Certainty vs volatility.
Liquidity vs illiquidity.
Fixed expense reduction vs growth potential.
Emotional comfort vs financial optimization.
For affluent households in Grosse Pointe, the decision often depends on where they are in life.
During high-earning years with strong liquidity, investing excess capital frequently makes sense.
In the final years before retirement, reducing fixed overhead can materially strengthen income durability.
What I Don’t Recommend
I don’t recommend:
Paying off a 3 percent mortgage at the expense of liquidity.
Carrying a 7 percent mortgage while aggressively investing.
Making the decision based solely on what a friend did.
The right answer depends on the structure of the full balance sheet.
Because once the mortgage is paid off, that decision is difficult to reverse.
And once capital is invested, volatility must be tolerated.
The Better Question
Instead of asking:
“Which one earns more?”
Ask:
“Which decision strengthens the overall structure of our financial life?”
When framed that way, the answer becomes clearer.
