Higher mortgage rates quietly changed the math on one of the most argued questions in personal finance. If you’re in tech, with a mortgage, RSUs, and real money to deploy, the answer isn’t as obvious as it used to be, and the stakes are higher than a simple rate comparison suggests.
In this episode, Amy Walls walks you through how to weigh a guaranteed return against an uncertain one, what extra mortgage payments actually compete with (it’s not your 401(k) match), how your equity comp and concentration picture change the call, and how to set a decide-once rule so you stop relitigating it every month.
You’ll learn:
(00:00) Introduction
(00:16) Should You Pay Off the Mortgage or Invest?
(00:57) The Basic Decision Framework
(02:26) Why Higher Mortgage Rates Change the Math
(03:19) Guaranteed Returns Versus Expected Returns
(05:59) Why Personal Behavior Matters
(06:09) Common Mortgage Payoff Mistakes
(09:02) Using RSUs and Bonuses
(09:18) Liquidity and Concentration Risk
(12:20) The Value of Peace of Mind
(12:34) Lower Fixed Costs and Employment Uncertainty
(14:58) When Psychology Changes the Best Decision
(15:50) What to Prioritize First
(18:47) Choosing a Lane Intentionally
(19:07) How to Contact Thimbleberry Financial
Jon Gay (00:08):
Welcome back to ThimbleberryU. I am Jon Jag Gay, joined as always by Amy Walls from Thimbleberry Financial. Hello, Amy.
Amy Walls (00:14):
Hey, Jag. Good to talk to you.
Jon Gay (00:16):
Always a pleasure to be with you.
Amy, our listeners, you got a mortgage, you've got RSUs vesting, maybe a bonus that just landed, and at some point, in the last year, with rates where they are, you've probably asked yourself the question a lot of listeners are asking right now (I know my wife and I had this conversation too): should I pay off my mortgage or invest when interest rates are high?
I mean, for a long time, that question felt settled and kind of doesn't anymore. So, today, we're going to kind of get into how you actually make that call, make it once, so you stop re-litigating it every time money hits your account.
So, Amy, before we get into the why, give me the plain version here. I'm going to ask you point blank: should you pay off your mortgage or invest with rates where they are right now?
Amy Walls (00:57):
Jag, it's a great question. And the answer is obviously it depends on various factors. What you need to do-
Jon Gay (01:05):
Here's your favorite answer: "It depends."
Amy Walls (01:07):
… is compare your mortgage rate to what you'd expect to earn investing after tax over a longer period, like the length of your mortgage, and then weigh how much you value certainty over a shot at more.
That comparison run with your own numbers is what decides the answer. There is no rule of thumb we can apply here. And the reason this question is even back on the table, is because the math has changed. A few years ago, it was easy. Rates are so low, what's the point?
Furthering this answer, paying down your mortgage is a guaranteed return equal to your rate. There's no volatility, there's no guessing. You know whatever your rate is, that's what you're making by paying it down. And so, when mortgage rates were sitting at around 3% or even lower, that guaranteed return was easy to beat by investing. The bar was so low.
But when we've got rates at 6%, even 7% where a lot of you are right now, if you've bought a house recently, that bar is a lot higher, right Jag? You recently bought a house, that's why it's changed for you.
Jon Gay (02:26):
Absolutely. And our previous house, we refinanced during COVID to like two something percent. Our new house, I think it's around 6 or 7. Again, my wife knows the exact number, I don't — but that's the idea.
Amy Walls (02:37):
(Laughs) So, you're right. And so, because of these higher rates, your investments need to consistently clear it over time to come out ahead. So, like you said, it's because things have changed. If someone's looking at this because they've bought a house, they've changed these things.
So, that's why it's back. It's not because people have gotten confused or forgotten. It's back because the ground genuinely shifted under that settled decision. And so, it's all going to depend on your numbers and also how you're wired.
Jon Gay (03:09):
That's psychology and behavioral investing we talk about so much. So, now, that we have kind of set the bar here, how do you actually make that comparison, that side-by-side comparison? What do you put on each side of the ledger, Amy?
Amy Walls (03:19):
Oh Jag, great question. On one side, a certain return equals your mortgage rate. That if you're paying that off, it means you're not losing 6% in interest. So, that's a set rate. There's no volatility, no sequence risk. It's just that number, straightforward.
On the other side, there is potentially a higher expected return from investing, but "expected" is doing a lot of the work there.
Jon Gay (03:55):
Those of you listening, that word “expected” is in air quotes. That’s the word doing all the work, yes.
Amy Walls (04:00):
So, if your expected rate of return is 7% over, let's say 30 years, someone just gets a new 30-year mortgage, that's expected, not promised. So, 6% of paying down the mortgage, meaning you're not going to pay interest versus gaining 7%, is that 1% big enough for you? Is the expected, is that enough growth to say, I'm not going to pay off the mortgage?
You're weighing guaranteed but lower, against probability higher, but not certain. And obviously, 7%, I picked because it is close to the 6%. And if we look at moderate and above in risk tolerance, that would be a pretty safe comparison over 30 years.
So, another thing we need to consider here is that investing has to clear that 6% or that 7% after tax, just to break even with paying it down. Anything less and the mortgage actually won. So, for example, you get a 7% rate of return in your investments, but after tax, it's five and three quarters for some reason — the mortgage paying that down just mathematically won.
So, what we need to do is run both sides after taxes because taxes can tilt in either direction depending on your tax bracket, your accounts you itemize, all these kinds of things. And that comparison sets up the numeric decision. That doesn't mean it's still the right decision for you though.
That spreadsheet is our starting point, not the finish line. You said it earlier, right? There are the actual numbers, and then there's the behavior, the psychology behind it. And so, next, we have to talk about how you're wired or between you and your wife, what you can agree on, and how you're wired. And that gets a vote too.
Jon Gay (05:59):
That makes a lot of sense. I mean, like I said, in our previous mortgage that was 2%, it's a lot easier to try to beat that on a market return, not as easy at 6 or 7%.
Amy Walls (06:08):
Absolutely.
Jon Gay (06:09):
Amy, what do most people get wrong when they try to work this out on their own?
Amy Walls (06:13):
The most common thing I hear is, "Well, I'm paying 6% in interest, so I'm automatically losing 6%. That's why I need to pay the mortgage off." That is the most common argument I hear. So, that argument fails to look at the opposite investing side. It's just an automatic, I'm losing 6%, I shouldn't be losing 6%. So, that's first.
But when we do get that comparison where we're looking at mortgage versus investing, it's pitting your mortgage against the wrong dollars. Your extra principal shouldn't be competing with your 401(k) match or your tax advantage space. Those need to come probably before we have this conversation.
The match in your 401(k), that's free money. And the tax treatment's going to be really hard to beat. That's just not a close call. Where the mortgage actually competes is with your taxable investing. So, outside of retirement accounts, the brokerage accounts, these are the dollars left over after all the obvious things like the 401(k) moves have already been made.
My point is you can't look at the 401(k) to say, "Well, I should stop that as my comparison." It's what dollars would be available to pay off the mortgage, and those would be the ones you'd be investing in a brokerage account.
Jon Gay (07:48):
Got it.
Amy Walls (07:49):
The other myths I see a lot is assuming mortgage interest is still lowering your taxes. Now, in today's new math, people with a higher interest rate probably have a newer house. And so, it's probably a pretty fair assumption that the mortgage interest is lowering the taxes if you itemize.
But if you're taking the standard deduction (and a lot more people have been), that write off argument doesn't apply.
Jon Gay (08:21):
I feel like you're a fly on the wall in my house because we were actually talking about standard versus itemized coming up this year. That's going to be a conversation with our CPA come February.
Amy Walls (08:30):
Yep, that is happening a lot more. So, confirming that before you make this decision is also important. It's not just what did I do last year, but am I on the border, where what I've done might not make sense going forward?
And so, then you line that mortgage up against the right alternative of taxable investing and what you're doing from a tax perspective, and that all should be at least a couple steps more clear than it was before we started this episode.
Jon Gay (09:02):
Makes sense. So, let's talk about equity comp. I know the tech sector is a specialty of yours at Thimbleberry Financial. A lot of our listeners have RSUs or bonuses, income that shows up in chunks rather than steadily. How does that change how this decision plays out for you?
Amy Walls (09:18):
The main way it shows up is just it changes the conversation from a monthly question into a lump sum question, which does change the framing pretty drastically. So, when vesting happens or a bonus lands, the first thing to look at isn't, "Ooh, what's my mortgage rate?" It's your liquidity and your concentration risk.
For example, if most of your net worth is already sitting in your home and in your employer stock, using a windfall such as a vesting or such to pay down the house can really leave you without flexibility because you're now illiquid.
The money that came in that could provide this flexibility is now in your home as equity where you can't get to it. And you aren't diversified because all your money is either in your employer stock or in your home. So, your home equity essentially has become a concentrated illiquid asset in the same way your company stock was. One of the things you were probably trying to undo in this decision.
So, pouring a windfall into a house can make a concentration problem worse, not better. So, really the order of operations here for our listeners is first, is diversification an issue? Do you need to get out of your company stock for some reason? If yes, terrific, you've taken a step forward. If that's yes, how much money do you need to be keeping on hand?
We've talked a lot in prior episodes about kind of the Maslow's hierarchy of financial planning, as I like to call it, covering your current situation from assets and liabilities. Obviously, paying off your mortgage is taking care of a liability, but do you need a more solid cash reserve to be able to successfully focus on paying down this liability?
And so, that's kind of phase two, step two, of this. And if your answer to, I don't need to diversify out of my company stock was “no,” well, then, we may not really need to talk about this. And I mean, we can take that further with do you want to? What do you plan to do with that money? Does it support your goals to get it out of that? All of that's also important.
But since today's episode is talking about the mortgage versus investing, if you're going to diversify away from the company stock, that typically means you're going to be investing that money somewhere else.
Cash reserves are a safe place because one, if we're talking cash reserves that are FDIC insured, that's smart. Two, it's a good idea to have a cash reserve before you really start investing for other goals.
Jon Gay (12:20):
So, Amy, as I talked about with my wife and I, there's a peace of mind factor here. I'll be honest, my own version of this is mostly emotional. It's the idea of not owing anybody. Does that count for something or is it just noise? This gets back into that behavioral investing piece, right?
Amy Walls (12:34):
Totally, Jag. It counts and it's not noise. So, that's the first thing I want you to hear. A paid-off home lowers fixed costs, which lowers the number you absolutely have to earn every single month. So, in tech, especially where income can be lumpy and layoffs are real, that lower breakeven point has concrete value.
I know somebody in tech who had bought their first house more recently so it wasn't at the great rates, and has plenty of money in taxable investments. In fact, could pay off their mortgage from that, but took out the mortgage initially. And after a period with where tech has been and changes with their employment, they started to feel more nervous about what the near-term future in tech looks like.
And so, what happened was they were opposite of what I was saying earlier of, "Ooh, use it to build a cash reserve because you need it." Their cash reserve was getting so big because they felt the need for an extra-large cushion given all these factors. It wasn't just that my job in tech is uncertain, but it was also that I now have this mortgage, that I haven't had very long, that's still new to me that's hanging out there.
And the things together were making them want to, for lack of a better word, hoard cash in case they got laid off so that they could cover everything. But in fact, some things were getting kind of double counted in that.
So, ultimately, what we did is we said, "Look, let's reduce that cash to a reasonable size. Let's use some of your brokerage assets to actually pay off the mortgage. Let's be done with it because it is causing, along with the tech chaos, you to make decisions you wouldn't normally make. And you can. And now what you were putting towards your mortgage can simply go back towards the investments that you liquidated."
Jon Gay (14:58):
Goes back to that peace of mind.
Amy Walls (15:00):
So, the math piece was still a stronger case for this client towards keeping the mortgage and investing. But the psychology of it and the behavior of it, and how they felt that didn't allow them to keep doing the investing that made sense made the case for let's get rid of the mortgage.
Jon Gay (15:27):
So, one of my wife's favorite phrases when I'm telling a story is “land the plane.” So, let's actually land the plane here before we wrap up here, Amy. (Laughter)
How do you stop kind of waffling and pondering this and make that call?
Amy Walls (15:43):
Since you're talking about planes, let's look at what's right in front of us on the runway.
Jon Gay (15:49):
Fair enough.
Amy Walls (15:50):
You've got free money to invest or to pay off the mortgage. Let's make sure you've done things like capture the match in your 401(k), that you do have a good cash reserve, that you've gotten rid of anything charging more than your mortgage rate.
Jon Gay (16:08):
Yes. Credit cards.
Amy Walls (16:11):
Exactly. And I think for almost everybody, those three things come before the decision of do I invest or do I pay off the mortgage?
Jon Gay (16:21):
That's fair.
Amy Walls (16:22):
And then weigh those two items (paying off the mortgage or investing) honestly. The math we already talked about. How does your mortgage rate compare to what you'd reasonably expect from investing over the length of your mortgage?
I have heard people (and I didn't address this earlier) say, "Well, just this year." But maybe that was in a down year. That's not the timeframe. It's over the length of the mortgage. And then you have to add into that how much you personally value certainty over potential.
The other thing is you don't have to go all or nothing. A lot of people do set this up as a split. Some extra goes to the mortgage principal because they like the fact they're taking action on that specific goal. And some goes to investing. We're talking in a brokerage account, so the money is very liquid. That respects both the math and actually lets you sleep.
Now, is it the most efficient way to go about this? Almost always not.
[Laughter]
But if psychologically, it's a thing that finds the balance until somebody can talk you through the rest of it, that's okay. But why that works is that the mortgage is getting paid down. I think all our listeners can understand that piece. But the investing piece, that's going to grow.
And same as if you weren't paying down your mortgage, the idea is if you can get a higher growth rate than you can your mortgage rate, then you actually would be able to sell those investments, pay the taxes, and pay the mortgage off even faster than just putting extra money towards the mortgage.
Jon Gay (18:18):
Right, okay.
Amy Walls (18:19):
That's the investing argument because you'd have the money to pay the mortgage off sooner. Whether you do or not is a whole different decision. So, whatever you land at, you want to also automate it. Make it your standing rule so that money flows the way you're expecting it to, that you decided it did, so that you don't keep revisiting the decision-making.
Jon Gay (18:42):
How many episodes have we done on decision fatigue? You're taking that off your plate every month, right?
Amy Walls (18:46):
Absolutely.
Jon Gay (18:47):
So, just to reiterate that point; it's a deliberate choice that you can really kind of put down. The goal is not to win the math, it's to pick a lane on purpose and stop carrying that argument around again, that decision fatigue.
Amy, if our listeners want to talk to you about this or anything related to their finances and investing for their future, how do they best find you at Thimbleberry Financial?
Amy Walls (19:07):
Yeah, they can find us online at thimbleberryfinancial.com or by giving us a call at 503-610-6510. And Jag, I want to comment, what you last said — I think it was to pick a lane on purpose and stop carrying the argument if I remember your words?
Jon Gay (19:25):
Yeah.
Amy Walls (19:26):
That's right. It's intentionality. It's intentionality with a reason behind it.
Jon Gay (19:32):
We all have enough things in our lives stressing ourselves out, why don't we just take this one off our plate.
Amy Walls (19:36):
Absolutely.
Jon Gay (19:37):
Alright. Take care, Amy. We'll talk soon.
Amy Walls (19:38):
Sounds good, Jag.
[Music Playing]
Voiceover (19:39):
Securities offered through registered representatives of Cambridge Investment Research, Inc., a broker-dealer, member of FINRA, SIPC. Advisory services through Cambridge Investment Research Advisors, Inc., a registered investment advisor. Cambridge and Thimbleberry Financial are not affiliated.
Discussions in this show should not be construed as specific recommendations or investment advice. Always consult with your investment professional before making important investment decisions.
Security is offered through registered representatives of Cambridge Investment Research, Inc., a broker-dealer, member of FINRA, SIPC. Advisory services through Cambridge Investment Research Advisors, Inc., a registered investment advisor. Cambridge and Thimbleberry Financial are not affiliated.