Why Paying Off Low-Cost Debt Isn't Always the Best Move for Investors

By Brian Rezny, President of Rezny Wealth Management – A Fee-Only Fiduciary Money Manager

As investors, we're often told that being debt-free is the ultimate goal. But what if holding onto low-cost debt could actually build more wealth over time? In this article, we'll explore why rushing to pay off debts like a low-interest mortgage might not be the smartest strategy, especially if you can invest that money for higher returns. We'll use simple comparisons, including a 30-year mortgage at 4.5% interest versus investing at 8% growth, and show the long-term impact for someone starting at age 35 until 65. This isn't about taking on risky debt—it's about smart leveraging when the math works in your favor.Keep in mind, this advice assumes you're in a stable financial position with an emergency fund, no high-interest debt, and a diversified investment plan. Always consult a fiduciary advisor to tailor this to your situation.

The Case Against Always Paying Off Debt Early

• Debt Isn't Always the Enemy: Low-cost debt (like a mortgage under 5%) can act as a tool for wealth building. If your after-tax borrowing cost is lower than what you can earn investing, you're essentially profiting from the spread. For example, borrowing at 4.5% while earning 8% means a 3.5% net gain on someone else's money.

• Opportunity Cost Matters: Paying off debt early locks up capital that could grow elsewhere. According to financial experts, if your debt interest rate is below 6%, investing often outperforms debt payoff due to compound growth in the market.

• Inflation Works in Your Favor: Over time, inflation erodes the real value of fixed debt payments. A $1,500 monthly mortgage feels cheaper in 20 years as incomes and prices rise, freeing up more cash for investments.

• Tax Benefits Add Up: Mortgage interest is often deductible, reducing your effective interest rate (e.g., 4.5% might drop to 3-3.5% after taxes for higher earners). This makes keeping the debt even more attractive versus taxable investment gains.

• Liquidity and Flexibility: Debt payoff ties up money in illiquid assets like your home. Investing keeps funds accessible for opportunities or emergencies, which is crucial for long-term financial security.

  
  

Statistical Insight: While many Americans prioritize debt freedom—about 23% of homeowners pay off mortgages early—the average U.S. mortgage balance rose to $252,505 in 2024, suggesting most keep debt longer to leverage low rates. Historical data shows the S&P 500 has averaged around 10.5% annual returns since 1957, far outpacing typical mortgage rates.

Why Low-Cost Debt Beats Payoff When Investments Grow Faster

• The Basic Math of Leverage: If you borrow at a low rate and invest at a higher one, your money works harder. For instance, a 4.5% mortgage costs you interest, but an 8% investment return (conservative estimate based on stock market averages) generates excess gains. Over decades, compounding amplifies this difference.

• Real-World Comparison: Mortgage vs. Investing: Let's assume a $300,000 30-year mortgage at 4.5% interest (monthly payment: $1,520). Total interest over the term: about $247,000. Now, compare two scenarios for a homebuyer with $300,000 cash:

  • Option A (Pay Cash, Invest Monthly Savings): Buy the house outright (no debt), then invest the $1,520 monthly at 8% compounded monthly. After 30 years, your investment grows to approximately $2,265,000.

  • Option B (Take Mortgage, Invest Lump Sum): Take the mortgage, invest the full $300,000 upfront at 8% compounded monthly. After 30 years (mortgage paid off), your investment reaches about $3,281,000.

  • The Difference: Option B nets you over $1,015,000 more than Option A, thanks to the power of upfront compounding versus gradual contributions. This assumes market returns hold steady, but historical S&P 500 data supports 8% as a reasonable long-term expectation (actual average: 10.5%, but we use conservative figures).

• Adjusting for Average Mortgages: The average U.S. mortgage size hit $379,000 in 2025. Scaling our example: For a $379,000 loan, monthly payment jumps to ~$1,920, with Option B yielding about $4,150,000 vs. Option A's $2,860,000—a $1,290,000 edge.

• Risk Considerations: Markets aren't guaranteed (S&P 500 has seen negative years), so this works best for long horizons and diversified portfolios. If rates were higher (e.g., current averages around 6.9%), payoff might edge out investing.

• Broader Stats on Choices: Surveys show 60% of financial advisors recommend investing over early payoff for low-rate debts, especially if retirement savings are lagging. In 2024, with rising home prices, average monthly payments reached $2,207, highlighting why locking in low rates long-term preserves capital for growth.

  
  

Long-Term Impact: From Age 35 to 65

• The 30-Year Horizon: For a 35-year-old, keeping a low-interest mortgage until 65 allows investments to compound over three decades. Using our $300,000 example, the $1 million+ difference in Option B translates to a more secure retirement—potentially covering healthcare, travel, or legacy planning.

• Compound Growth in Action: At 8% returns, your money doubles every 9 years (rule of 72). By age 65, the invested lump sum in Option B has multiplied over 10 times, while debt payments remain fixed. This spread grows exponentially: After 10 years, the gap is small (~$150,000); by 20 years, it's ~$500,000; at 30, over $1 million.

• Real-Life Outcomes: Studies indicate retirees with paid-off homes but underfunded investments often face shortfalls—up to 30% less wealth than those who invested aggressively. Conversely, leveraging low debt has helped millions build seven-figure portfolios, per investment firm data.

• Emotional vs. Mathematical: Peace of mind from being debt-free is valid, but data shows investors who prioritize returns over payoff average 15-20% higher net worth by retirement.

• Final Advice: Always ensure your money is managed properly, effectively, and actively. Trust only a fee-only fiduciary money manager like Rezny Wealth Management—anything else introduces conflicts, mediocrity, and a "set it and forget it" mentality that could cost you dearly. We're here to help you navigate these decisions for true long-term success.

General informational content only. Not tax, legal, or investment advice. Consult a financial professional before making investment decisions. Conduct due diligence. All investments involve risk, including potential loss of principal.