Financial Planning Tip June 2025

In past years we were staunch advocates against prepaying one's mortgage. The math was obvious when interest rates were 4% and below: The stock market is highly likely to return more than 4% over the 30-year mortgage term, so keep your savings in the market instead. Does the math still hold when mortgage rates are closer to 7%? In short, yes. Unless mortgage rates are in the double digits, we'd advise you make only the required mortgage payment.

We looked over stock market returns for the past 100 years, and found only one 30-year period where returns were under 7%: The 30-year window between 1928-1957. The median 30-year rolling return is a touch over 10%. Add to that, mortgage interest is often tax-deductible, reducing your borrowing cost. And the cherry on top: you can always refinance to a lower rate, but tax rules generally prohibit you from deducting interest following a cash-out refinance. To that point, if you prepay your mortgage at 7%, you can't change your mind if interest rates fall.

What if you use a 15-year mortgage instead? Our data set has 84 rolling windows of 15-year returns. Of those 84 observations, 60 (about 70%) were over 7%. In other words, if you opt for a 15-year term, there is a 70% chance (based off the historic record) that you'll do better sending that extra principal payment to the stock market instead of the bank. Our other two points about tax deductibility and refinancing still hold, adding strength to our belief that there are better ways to save than prepaying your mortgage.