Debt Free Versus A Mortgage: What’s the Best Financial Move?
Disclaimer: Good Day, Readers. WealthBuildingPowers blog is a financial literacy/competency blog and does not provide specific investment recommendations.
Is it better to borrow $300,000 for a home purchase and keep Your Money Invested?
Let’s compare the two scenarios.
Assumptions
- You have $300,000.00 invested in the market
- You have sufficient cash to put down 20%
- Targeting a property worth no more than $500,000.00
- Mortgage interest rate assuming worst case today: Seven Percent
Scenario 1: Cost of Mortgage
- Loan Details: $300,000, 7% interest rate, 30 years.
- Monthly Payment: Monthly payment, excluding taxes, insurance, and Homeowners Association, if applicable, is $1,996.77.
- Annual Interest Paid: In the first year, you’ll pay more interest than principal. Approximately $20,993 out of $23,961 in payments will go toward Interest.
- Tax Benefit**: Mortgage interest is tax-deductible (if eligible). At a 20% tax rate, your effective interest cost** becomes:
- Annual interest cost after tax = $20,993 × 0.80 ≈ $16,794.
- Out-of-Pocket Costs: Monthly payment remains at $1,996.77, but the tax benefit reduces the real interest cost over time.
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Scenario 2: Cost of Being Mortgage Free Versus Investing Your $300,000.00
- Investment in an S&P 500 ETF.
- Time: 30 years
- Assumed Annual Return: The S&P 500 has historically returned ~10% annually over the long term, with about 7% adjusted for inflation.
- If $300,000 grows at **7% annually**, using compound interest:
- Future value FV ≈ $2,280,400.00
Opportunity Cost of No Mortgage**: No interest or tax deduction, but your investment continues compounding uninterrupted. In 30 years, you would have ~$2.3 million in Your Investment Account.
Comparison
Considerations
1. Market Volatility: As we have experienced in 2025, the stock market can fluctuate significantly up and down. While the S&P 500 has shown long-term growth, annual returns fluctuate. There’s no guarantee of consistent 7% returns.
2. Liquidity: Retaining cash (by taking a mortgage) provides flexibility for emergencies or alternative investments.
3. Interest Cost vs. Investment Returns: Investing offers better returns if your S&P 500 investment outpaces the 5.6% effective interest rate (post-tax). Over 30 years at 7%, it likely will.
4. Personal Risk Tolerance: Leveraging debt can amplify gains and increase financial risk. Liquidating cash avoids debt but sacrifices potential market growth.
5. Your age: As we near retirement, our risk tolerance decreases. But not all debt is bad!
Conclusion
Investing in the S&P 500 ETF is a better financial strategy if you can tolerate market risk and aim for long-term growth. The potential ~$2.28 million far exceeds the total cost of the mortgage plus tax benefits. However, if guaranteed stability, less risk, or liquidity is your priority, retaining cash and taking the mortgage could be the wiser choice.
You can increase or decrease the size of your mortgage and utilize a blended approach.
Ultimately, your personal risk tolerance, financial goals, and priorities should guide your decision! Seek your financial advisor’s advice, then utilize your critical thinking skills.
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I am a proud nerd (as my beautiful wife and daughter have told me) investment and finance blogger with an NC. State, Chemical Engineering, University Rutgers, MBA and Harvard University, Advanced Management education.
I left a corporate career because I desired to make a difference as a speaker and writer. I was blessed to be coached and mentored by strong women and men in my family and professional life. It is my time to serve and give back.
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I started my first business at ~13 years of age (a small but brilliantly created plant nursery). I am a successful investor in stocks, options, and real estate and am happy to share my finance and investment lessons. I am NOT a licensed financial advisor. Please do not construe my suggestions on this blog as recommendations for your situation. As an investor, you must establish your risk/loss tolerance. Investment in any asset involves risk, including complete loss.
Please seek your licensed CPA or fiduciary financial advisors for individual financial advice.
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