Should I Sell My Investments to Pay Down My Mortgage?
Many investors will at some point in their life face an interesting question with regards to mortgages and investing. The question can take a few different forms:
For investors with sizable portfolios: Should I liquidate some of my investments in order to pay down (or pay off) my mortgage?
For investors with excess income: Should I invest my excess income, or use it to pay down my mortgage?
For investors buying a home: Should I use some of my investments to make a larger down payment (or pay cash)?
For investors whose house has appreciated: Should I pull some money out of my home equity (via a cash-out refi or HELOC) to invest in the markets?
However the question arises, the fundamental tradeoff is the same: Is it better for me to invest my money in my home, or in the stock market?
For the purposes of this article, we will address this topic from the perspective of an investor with investments that could potentially be liquidated to pay down their existing mortgage. However, the principles in the article will generally apply to all of the situations described above.
The Core Tradeoff: Guaranteed vs. Probable Returns
Fundamentally, the decision between mortgages and markets is a question of leverage. You are essentially borrowing money (via your mortgage) to invest in assets (stocks and bonds). The decision requires you to compare two very different types of returns:
The Mortgage (Guaranteed Return): The interest rate you pay is a guaranteed negative return. If your mortgage rate is 6%, paying it off provides an instant, risk-free 6% return on your money. That return happens no matter what the economy does.
The Market (Probable Return): The stock market has historically returned about 7-10% annually over long periods. However, this is volatile and not guaranteed. The market offers a higher potential return in exchange for some uncertainty in the outcome.
The dilemma is whether the probability of higher market returns is worth the certainty of the mortgage cost. To resolve this clash between math and mindset, here are five key questions to ask yourself about your money and your life.
Question 1: Can My Investments Realistically Beat My Mortgage Rate?
This is the mathematical starting point. For the math to favor investing, your expected investment returns must comfortably exceed the cost of your debt. If the "spread" between the two rates isn't wide enough, the risk of the market isn't worth taking.
How to Answer: Look at your current mortgage rate.
Is it under 5%? The odds are very high that a diversified portfolio will outperform this rate over the long run. The math heavily favors keeping the money invested.
Is it over 6.5%? The "hurdle" is much higher. Expecting the market to consistently beat a guaranteed 6.5% is optimistic and risky. The math leans toward paying the mortgage down.
Caveat: If you are a high-income earner who itemizes deductions on your tax return, your effective mortgage rate is likely lower than your nominal mortgage rate. This is because the government effectively subsidizes your mortgage via the mortgage interest tax deduction. Instead of using your nominal mortgage rate in the comparison above, use your effective mortgage rate, calculated as follows:
Effective Mortgage Rate = Nominal Mortgage Rate × (1 - Your Marginal Tax Rate)
Example: A 6.5% mortgage for a taxpayer in the 32% bracket has an effective rate of just 4.42%.
In this scenario, your hurdle isn't 6.5%—it's 4.42% (possibly even less once state tax deductions are considered). This makes keeping the mortgage (and investing the money) much more mathematically attractive. But remember, this only applies if you itemize; if you take the standard deduction, your effective mortgage rate is the same as your nominal mortgage rate.
Question 2: Will This Leave Me Vulnerable in an Emergency?
Paying down your mortgage might sound great, but not if it comes at the cost of financial security. Home equity is nice to have, but it doesn't pay for groceries.
Financial security depends on a certain amount of liquidity—how quickly you can convert assets into cash. Stocks and bonds are highly liquid and can be sold to generate cash within days to cover emergencies. Home equity, however, is notoriously illiquid. Once you transfer money from your brokerage account into your home's principal, that capital is effectively "trapped" until you sell the property or secure a loan like a HELOC.
How to Answer: Figure out how much cash and liquid investments will remain after you pay down your mortgage.
Do you have enough to cover the unexpected, such as a loss of employment or a health emergency?
If the answer is "No," stop immediately. Never sacrifice your safety net to pay off a mortgage.
Note: Most retirement accounts cannot generally be accessed until age 59.5, and should be treated as illiquid assets until you have reached that age.
Question 3: How Close Am I to Retirement?
Your retirement time horizon fundamentally changes the definition of risk. If you are young or in the "accumulation phase" with 15+ years until retirement, time is your ally; you can afford to ride out market volatility because you have decades for your portfolio to recover and grow before needing to take withdrawals.
However, if you are approaching the "decumulation phase" or retirement, time becomes the enemy. Retiring with a large mortgage can cause challenges in early retirement if the market crashes and you are forced to sell depressed assets to pay your fixed mortgage bill. This can permanently deplete your portfolio much faster than planned.
How to Answer: Look at your retirement timeline.
Are you young or mid-career? You can likely ride out volatility to get higher returns. Lean toward keeping the money invested.
Are you retiring in <5 years? Eliminating a fixed monthly cost (the mortgage) can provide some protection, lowering the amount of cash you are forced to pull from your retirement portfolio each month, and insulating you if the market turns sour right as you quit working. Lean toward paying the mortgage down.
Question 4: Will Liquidating my Investments Generate a Large Tax Bill?
If paying down your mortgage will require you to liquidate investments that have grown significantly, selling them will trigger Capital Gains tax—likely 15% to 20% plus state taxes. For example, if you sell $100,00 of investments that have $50,000 in embedded gains, your tax on those gains could be $10,000 or more.
This tax bill acts as an immediate loss on your principal; selling $100,000 and immediately owing $10,000 in taxes means that you are effectively putting only $90,000 towards your mortgage, but at a cost of $100,000! This 10% "haircut" means you are sacrificing $100,000 of future growth to eliminate only $90,000 of debt today. Your mortgage rate would need to be punishingly high to make this worth it.
How to Answer: Look at the unrealized gain on the shares you plan to sell.
Is the gain small? (e.g., recent contributions or high-basis lots). The tax hit will be minimal and could be ignored in the decision.
Is the gain massive? (e.g., you bought 10 years ago). The tax bill will be significant, and will make it much harder to justify selling the investments to pay down the mortgage.
Question 5: Does My Mortgage Keep Me Up at Night?
It is helpful to understand the math, but no equation can quantify the feeling of owning your home outright. For some investors, a mortgage is simply "cheap leverage"—a tool that allows them to keep more money working in the market. But for others, debt is a heavy mental burden, and one that becomes amplified during market downturns. This emotional weight is a real factor in your financial health, and ignoring it in favor of pure mathematical optimization can lead to behavioral mistakes when the market gets rocky.
How to Answer: Be honest about your feelings towards your mortgage.
Do you view debt as a tool? If you are comfortable with leverage and sleep soundly during market dips, prioritize the math and keep the money invested.
Do you view debt as a burden? If the monthly payment stresses you out or you crave the freedom of owning your home outright, lean toward paying the mortgage down.
The Decision Checklist
Lean toward KEEPING THE MONEY INVESTED if:
☐ Your mortgage rate is low (under 5%).
☐ Paying it down would drain your liquid cash reserves.
☐ You have a long time horizon (15+ years until retirement).
☐ Selling your investments would trigger a large tax bill.
☐ You are comfortable with debt and market volatility.
Lean toward PAYING DOWN YOUR MORTGAGE if:
☐ Your mortgage rate is high (over 6.5%).
☐ You will have plenty of other liquid assets remaining after the payoff.
☐ You are nearing retirement (<5 years)
☐ You can sell assets with little to no capital gains taxes.
☐ You value peace of mind over maximizing potential returns.
