Point: Paying off a mortgage is better than a bond fund or opening a CD.
I regularly tell my planning clients that a mortgage is merely the inverse of bond. When you own a bond or bond fund, you are lending money to an entity that pays you interest and your principal back. When you take out a mortgage, it’s the reverse. Paying off or paying down the mortgage is better than owning a bond in the taxable account as it’s always at least tax-neutral, and typically tax-advantaged, to jettison the bond and pay down the mortgage, as long as one has enough liquidity. I question the wisdom and practicality of lending money out at 2.28% (the rate of the Vanguard Total Bond Fund) and borrowing it at a higher rate.
Counterpoint: I’m missing the point, Kinniry insisted. Consider a hypothetical of an individual with a $1 million portfolio (60% stocks/40% fixed income) and $1 million home with $400,000 mortgage at a 3.2% interest rate. He argued one could likely make a greater return with that 60/40 split than the low mortgage rate.
I pivoted the hypothetical to viewing the situation this way: The investor actually had a home worth $1 million and a portfolio worth $600,000 that was 100% invested in stocks). As I see it, the $400,000 mortgage and the bond fund cancel out. One shouldn’t borrow the money at 3.2% only to lend it out at 2.28%. While Kinniry and I weren’t on the same page on the comparable bond fund to use (he advocated for corporate and muni bonds), we both agreed that it’s not a good idea to borrow money at a higher rate than one expects to receive from a comparable investment.
