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Should I pay off my mortgage early or invest that money?

Many years ago, my father-in-law had a 4-percent interest rate on a 1,600-square-foot brick rancher in suburban Cleveland, and he always shook his head and laughed when his bank sent him a letter, urging him to pay off his mortgage. The bank was paying him 4 3/4 percent interest on the money in his savings account -- see, I told you it was many years ago -- so why, he reasoned, would he pay off his mortgage early? 

Maybe you're able to pay off your mortgage, and you're asking yourself that question today. What to do? It really comes down to the interest rate. If your mortgage interest rate is lower than the percentage increase you can expect to achieve by investing that money, then you should invest it. Putting it another way: The S&P 500 Index, a benchmark of American stock performance, has returned an average annual return of around 8 percent, so if your mortgage interest rate is less than that, then it may very well  make sense to invest your nest egg in your portfolio vs. your home. 

Businessinsider.com had a financial planner do the math on this, looking at several different scenarios, and investing always made the most sense. When I have run cash flow comparisons for clients on investing vs. paying off a home 00 which more often than not-- appreciates more slowly than investments in stocks (50 BPS above inflation on average), I have to agree that in most cases the client has more liquidity and a bigger nest egg in retirement taking the investment route.  Again, Investing made the most financial sense, but it doesn't always help you sleep better at night.   

I haven't factored in the peace-of-mind argument, which should never be ignored: If paying off your mortgage relieves stress and gives you peace of mind, that becomes an important reason to do it, because you can't put a price on peace of mind.

Of course, it always makes sense to consult with your tax and/or financial adviser before deciding what to do with a large amount of money.