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Short Summary
Main recommendation: The answer depends on your goals; if you are saving and investing about 25% of gross income, Ryan Preston and Bo lean toward investing the extra money rather than prepaying a low-rate mortgage, while keeping some prepayment as a compromise. Ryan argues that a 38-year-old in a diversified portfolio could likely beat a 2.85% return over the long term, but he stresses that being debt free may matter more to some people than mathematical optimization.
Key Points
- Ryan reasons that money is a tool for reaching goals, so the choice should start with whether being debt free ranks above retirement and financial independence.
- Mathematically, investing in a well-diversified, risk-asset portfolio that compounds at 6 to 10% per year is likely to outperform a 2.85% mortgage rate over the long term.
- Ryan considers 2.85% one of the lowest rates he will see for the rest of his life, making it worth capitalizing on while it lasts.
- Under 45, the focus is on building wealth to exploit compounding; after 45, the focus shifts toward preserving wealth and de-risking.
- Ryan and Bo follow a compromise on their commercial real estate loan: they invest most of the extra money and still prepay a smaller portion.
- Bo notes the decision is not purely analytical; the emotional desire to simplify finances and be debt free is a real factor.
Details Worth Noting
- Concrete instructions: Save and invest at least 25% of gross income before considering extra mortgage payments. Use dollar-cost averaging by investing a fixed amount every month rather than a lump sum. Round up monthly mortgage payments to pay down the loan gradually. To test the math, estimate the extra amount you would pay (for example, an extra 500 or 1,000 dollars per month), open an individual or joint account, and invest that money in a low-cost index fund using dollar-cost averaging.
- Ryan's personal situation: he has about 90% equity in his home with roughly 10% debt remaining at a 2.5% rate, and his goal is to be completely debt free by age 50.
- Ryan stresses that primary mortgages generally carry no prepayment penalties, but commercial loans often do, so he negotiated the right to prepay their commercial loan.
- Ryan admits his "bet" that he can beat Bo's debt-free-at-50 goal through investing is partly a framing device, since Bo has already figured out the optimal approach, and Ryan would still value being debt free even if it is slightly less optimized.
Bottom Line
The choice between prepaying and investing comes down to what you want your money to accomplish: mathematically, investing often wins at low mortgage rates, but a blend of investing and gradual prepayment can satisfy both the numbers and the desire for a simpler, debt-free life.
