Can paying down a mortgage be considered an “investment”?
I think it is just semantics, but this example demonstrates what they mean by that: If you put $100 in a CD today, it will grow and you will be able to take out a greater amount plus the original principal at a later time. If you put $100 extra on your house payment today, you may save some money in the long run, but you won't have an asset that you wouldn't otherwise have at the end of the term that you can draw on without selling the property. But of course, you can't live on the street, so you need another house. So ultimately you can't easily realize the investment. If you get super technical, you could probably rationalize it as an investment, just like you could call clipping coupons investing, but it all comes down to what your financial goals are. What the advisers are trying to tell you is that you shouldn't consider paying down your mortgage early as an acceptable substitute for socking away some money for retirement or other future expenses. House payments for a house you live in should be considered expenses, in my opinion. So my view is that paying off a note early is just a way of cutting expenses. Paying down your mortgage saves lots of interest. With a long term mortgage you end up paying twice us much to the bank than the sales price of the house. Even low mortgage interests are higher than short term bonds. The saving of those interest are as much an investment as the interest you get from a bond. However, before paying off a mortgage other higher interest loans should be paid off. Also it should be considered if the mortgage interest create a tax reduction in the comparison with any other options. Your mortgage represents a negative cash flow of $X for N months. The typical mortgage prepayment doesn't reduce your next payment, but does reduce the length of the mortgage. If you look at the amortization table of a 30 year loan, you might see a payment of $1000 but only $50 going to principal. So if on day one you send an extra $51 or so to the bank, you find that in 30 years you just saved that $1000 payment. In effect, it was a long term bond or CD, yielding the post tax rate of the mortgage. Say your loan were 7%. At 7%, money doubles every 10 years or so. 30 years is 3 doubles or 8X. If I were to offer you $1000 and ask for $7500 in 30 years, you might accept it, with an agreement to buy me out if you refinanced. For me, that would be an investment. Just like buying a bond. In fact, there is a real return, as you see the cash flow at the end. The payments 'not made' are your payback.  Those who insist it's not an investment are correct in the strict sense of the word's definition, but pedantic for the fact in practice, the prepayment is a choice to be considered alongside other investment choices. When I have a mortgage, I am the mortgagor, the bank, the mortgagee. Same as a company issuing a bond, the Bank holds my bond and I'm making payments to them. They hold my bond as an investment. There is no question of that. In fact, they package these and sell them as CMOs, groups of mortgages. A pre-payment is me buying back the last coupon on my mortgage. I fail to see the distinction between me 'buying back' $10K in future coupons on my own loan or me investing $10K in someone else's loans.  The real question for me is whether this makes sense when rates are so low. At 4%, I'd say it's a matter of prioritizing any high rate debt and any other investments that might yield more. But even so, it's an investment yielding 4%.  Over the years, I've developed the priorities of where to put new money - The priorities are debatable. I have my opinion, and my reasons to back them up. In general, it's a balance between risk and return. In my opinion, there's something wrong with ignoring a dollar for dollar match on the 401(k) in most circumstances. Others seem to prefer being 100% debt free before saving at all. There's a balance that might be different for each individual. As I started, the mortgage is a fixed return, with no chance to just get it back if needed. If your cash savings is pretty high, and the choice is a .001% CD or prepay a 4% mortgage, I'd use some funds to pay it down. But not to the point you have no liquid reserves. Let's start from the premise that the mortgage is something you will have anyway because you need it to live (as opposed to say getting a bigger mortgage initially in the expectation of paying it down faster than scheduled). In that case I think paying down a mortgage certainly is an investment; one with a well-defined interest rate and maturity that depends on the precise terms of the mortgage. For example I have a (UK) mortgage that's fixed for the next two years at about 5%, and allows overpayments of £500 per month, which can be withdrawn at any time. So I treat those overpayments as equivalent to savings with quite a nice interest rate, especially since mortgage interest isn't tax deductible and so I actually get the full benefit of that interest rate. "From what I've read, paying down your mortgage -- above and beyond what you'd normally pay -- is indeed an investment but a very poor form of investment. In other words, you could take that extra money you'd apply towards your mortgage and put it in something that has a much higher rate of return than a house. As an extreme example, consider: if I took $6k extra I would have paid toward my mortgage in a single year, and bought a nice performing stock, I could see returns of 2x or 3x. Now, that implies I know which stock to pick, etcetera.. I found a ""mortgage or investment"" calculator which could be of use as well: http://www.planningtips.com/cgi-bin/prepay_v_invest.pl (scroll to bottom to see the summary and whether or not prepay or invest wins for the numbers you plugged in)" "If by ""investment"" you mean something that pays you money that you can spend, then no. But if you view ""investment"" as something that improves your balance sheet / net worth by reducing debt and reducing how much money you're throwing away in interest each month, then the answer is definitely yes, paying down debt is a good investment to improve your overall financial condition. However, your home mortgage might not be the first place to start looking for pay-downs to save money.  Credit cards typically have much higher interest rates than mortgages, so you would save more money by working on eliminating your credit card debt first. I believe Suze Orman said something like: If you found an investment that paid you 25% interest, would you take it?  Of course you would!  Paying down high interest debt reduces the amount of interest you have to pay next month.  Your same amount of income will be able to go farther, do more because you'll be paying less in interest. Pay off your credit card debt first (and keep it off), then pay down your mortgage. A few hundred dollars in extra principal paid in the first few years of a 30 year mortgage can remove years of interest payments from the mortgage term. Whether you plan to keep your home for decades or you plan to move in 10 years, having less debt puts you in a stronger financial position." I think there are a few facets to this, namely: Overall, I wouldn't concentrate on paying off the house if I didn't have any other money parked and invested, but I'd still try to get rid of the mortgage ASAP as it'll give you more money that you can invest, too. At the end of the day, if you save out paying $20k in interest, that's almost $20k you can invest. Yes, I realise there's a time component to this as well and you might well get a better return overall if you invested the $20k now that in 5 years' time. But I'd still rather pay off the house. Something you invest in has the ability to grow in value.  So examples of investments would be buying stocks, bonds, currencies, commodities.  Buying your house or a piece of real estate can be considered an investment because the house/property will hopefully be worth more as time passes.  So the act of paying down a mortgage really isn't an investment. "It very much comes down to question of semantics and your particular situation. Some people do not view a house (and most upgrades) as an investment, but rather an expense.  I certainly agree that this is probably the case if you pay someone else to make the repairs and upgrades.  However, if you are a serious DIYer, that may not be the case.  Of course, if the house is a money pit and/or you were unfortunate to buy when prices where ridiculously high, you'll have a hard time making any money on this ""investment.""  To continue this game of semantics, you may also consider the value you extract from your home while you are living in it. On to the mortgage itself.  Chances are that it is a long term, relatively low rate loan and that the interest is deductible.  So, there are some disadvantages to paying it down early, even without early payment penalties.  Paying down early on the principal is a disadvantage from a tax perspective.  How much of a disadvantage hinges on the rate. Now, a debt is a liability on your personal balance sheet.  It drags down any returns you may have from investing.  However, a home lone is not generally subject to the cardinal rule of paying off your high interest debt before investing.  It should not be relatively high and it pays for something necessary.  It may be that any credit card debt you have may have paid for something considered necessary.  However, with the relatively high interest rates, you have to question just how necessary any credit card debt really is.  Not to mention that there is no tax advantage. So, it comes down to the fact that a home loan should be relatively low interest, paying for something you must have and that you hopefully have some tax advantage from the interest you pay on it." If your mortgage interest is tax-deductible, it's generally a bad idea to pay down the principal on the mortgage because you'd be losing the tax deduction. You could instead invest it in a tax-free municipal bond fund, especially if you're in a high tax bracket (including state and local marginal tax rates). For example, if you have a 5% rate mortgage on your home, you could invest in a 3.5% municipal bond and still come out ahead when you apply the tax deduction to your income at a 44% (33% federal + 7% state + 4% city in NYC) marginal tax rate.
There's a ton of great advice here.  It's very challenging to come up with something that hasn't already been suggested.  I'm curious to know how many years you have left to pay down the mortgage at the regular rate of payment.  If it's more than 15 years, it might be worthwhile to consider refinancing your mortgage to a shorter term (15 years or even 10 years if your income supports it).  Rates on fixed-interest mortgages at those terms are down in the 3% range and lower (at least according to bankrate.com).  Refinancing to a shorter term would be another way of paying off your home faster (with fewer of those dollars going toward interest payments). If you've got fewer than 15 years left to pay off your mortgage, following any of the other advice you've received here should keep you in great financial shape. First, i think you're doing awesomely for your age. Here's what i'd do in your situation (disclaimer: These are just my personal opinions from experience with my own finances.): I'd do all those things and partition the money so that i ensure i do them all. That may mean not dollar cost averaging monthly but rather quarterly to keep fees-percentages down, but i think that's reasonable for your age. Something i don't think you should overlook with regard to your mortgage is the freedom afforded you by paying off a home. It provides you with the freedom to be out of work, between work, or take an extended leave without the fear of how to pay your bills, the mortgage tending to be a significant percentage of the monthly bills. If that's not something you've considered, not a concern, or not something you care about, then paying off your home probably isn't a priority so I'd drop that step and put more money into investments. Lets do the math, using your numbers. We start off with $100K, a desire to buy a house and invest, and 30 years to do it.  Scenario #1 We buy a house for $100K mortgage at 5% interest over 30 years. Monthly payment ends up being $536.82/month. We then take the $100K we still have and invest it in stocks, earning an average of 9% annually and paying 15% taxes.  Scenario #2 We buy a house for our $100K cash, and then, every month, we invest the $536.82 we would have paid for the mortgage. Again, investments make 9% annually long term, and we pay 15% taxes.  How would it look in 30 years?  Scenario #1 Results: 30 years later we would have a paid off house and $912,895 in investments Scenario #2 Results: 30 years later we would have a paid off house and $712,745 in investments Conclusion: NOT paying off your mortgage early results in an additional $200,120 in networth after 30 years. That's 28% more. Therefore, not paying off your mortgage is the superior scenario.  Caveats/Notes/Things to consider Play with the numbers yourself: Consider not buying the house? Consider a cheaper property? What are your actual goals? Owning vs renting? Perhaps an actual investment goal? What is your rent now vs the mortgage on the house? What is the time frame for the mortgage you are considering?  Those are the real questions you need to ask yourself. It does sound like you can become overleveraged with this property, although your down payment is quite substantial, but one single thing goes wrong and your cash flow is irreparably constricted. I personally wouldn't take that risk if I had the same forecast of expenditures, but this could be altered if there were particular investment goals I had in mind. In such a situation, is there any reason, financial or not, to NOT pay   as many points as mortgage seller allows? I can think of a few reasons not to buy points, in the scenario you described: If interest rates decrease you could be better off refinancing to a lower rate than buying points now. If buying points reduced your down payment below 20% then the PMI would more than offset the benefit of having purchased points. Your situation changes and you aren't able to stay in the home as long as planned.  That said, current interest rates are pretty low, so I'd probably gamble on them not getting too much lower anytime soon. I also assume that if you can afford as many points as they allow, that you wouldn't have to dip below 20% down payment even with points. Edit: Others have mentioned that it's important to note opportunity cost when calculating the benefit of purchasing points, I agree, you wouldn't want to buy points at a rate that saved you less than you could earn elsewhere. Personally, I've not seen a points scenario that didn't yield more benefit than market average returns, but that could be due to my market, or just coincidence, you should definitely calculate the benefit for your scenario and shop for a good lender. Don't forget that points are tax deductible in the year paid when calculating their benefit. A Mortgage Backed Security or MBS is the security.  It's not an entity, it's essentially a contract.  As an investment they function more or less the same way a bond does. There is nothing wrong with the concept behind a Mortgage Backed Security.  Functionally securities like these allows banks and other institutions to lend to high-risk borrowers.  You package small slices of a wide range of risk from a large number of mortgages and the investor sill receive something similar to the average of the rates being charged.  Essentially from a big pool of mortgages of varying risk you will create a different big pool of bonds that can be sold to investors based on some sort of expected return.  For a frame of reference on a much smaller scale look at peer to peer lending sites like LendingClub and Prosper.  The idea is lots of people of varying risk profiles make requests for loans of varying amounts.  You bring your $2,500 and invest $25 in to 100 different loans.  This way even if a few default you will still eek out a profit.  It also allows you to include riskier borrowers without materially impacting your expected return. "Home ownership is thought to be a lifetime investment and is touted as a big part of the ""American Dream.""  That's changing now, as a lot of younger people have seen their parents' lifetime investments become worthless thanks to a lot of shoddy book keeping and lending practices. The 15-year mortgage is becoming more common these days, but that's still three times longer than what Canadians are achieving." "First off, the ""mortgage interest is tax deductible"" argument is a red herring.  What ""tax deductible"" sounds like it means is ""if I pay $100 on X, I can pay $100 less on my taxes"".  If that were true, you're still not saving any money overall, so it doesn't help you any in the immediate term, and it's actually a bad idea long-term because that mortgage interest compounds, but you don't pay compound interest on taxes. But that's not what it actually means.  What it actually means is that you can deduct some percentage of that $100, (usually not all of it,) from your gross income, (not from the final amount of tax you pay,) which reduces your top-line ""income subject to taxation.""  Unless you're just barely over the line of a tax bracket, spending money on something ""tax deductible"" is rarely a net gain. Having gotten that out of the way, pay down the mortgage first.  It's a very simple matter of numbers: Anything you pay on a long-term debt is money you would have paid anyway, but it eliminates interest on that payment (and all compoundings thereof) from the equation for the entire duration of the loan.  So--ignoring for the moment the possibility of extreme situations like default and bank failure--you can consider it to be essentially a guaranteed, risk-free investment that will pay you dividends equal to the rate of interest on the loan, for the entire duration of the loan. The mortgage is 3.9%, presumably for 30 years.  The car loan is 1.9% for a lot less than that.  Not sure how long; let's just pull a number out of a hat and say ""5 years."" If you were given the option to invest at a guaranteed 3.9% for 30 years, or a guaranteed 1.9% for 5 years, which would you choose?  It's a no-brainer when you look at it that way."