Paying off the mortgage won’t maximize your investment returns — but it sure feels good

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Professional investors say paying off your mortgage is a bad move. Instead, the smart money says, you should max out your home loan and invest the proceeds.

Morgan Housel is a Wall Street pro and author of the new book The Psychology of Money, but he admits he doesn’t behave rationally on this front. Housel and his wife carry no mortgage on their home, a money move he acknowledges is irrational.

“On paper, it’s the dumbest thing you could possibly do,” Housel said Friday during an Instagram Live conversation with James Royal, senior investment and wealth management reporter at Bankrate.com. “You can get a 30-year fixed-rate mortgage at like 2.8 percent, which is the cheapest money you’ll ever have. Even though it’s the worst financial decision we’ve ever made, I think it’s the best money decision we’ve ever made. It’s one thing that gives us a level of independence and autonomy.”

Housel underscores the emotional complexity of this decision. On the one hand, paying off the mortgage creates a feeling of security, and the knowledge that the roof over your head is yours even if you lose your job, or if your investment portfolio craters.

On the other hand, using debt as leverage to boost returns is a common practice in the financial world. For most homeowners, home equity is a readily available source of cheap debt, especially with mortgage rates at record lows. The idea: Borrow against your home at 3 percent, then reap more than 3 percent from your investments.

A high-five moment

Housel, a partner at Collaborative Fund, says sometimes raw emotion overrules cold logic. Case in point: He and his wife celebrated paying off their mortgage.

“When we did it, it was like high five, hug each other, this is so cool,” Housel says.

The lesson, he says, is that maximizing every penny of returns can be emotionally exhausting.

“People should not just aim to be rational on a spreadsheet. Rational on paper, I think, is not a good financial goal,” Housel says. “People should aim to be reasonable and manage their own financial decisions about what makes them happy, and what helps them sleep at night.”

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