A reader at Get Rich Slowly asks:

I refinanced my house a few years ago at a great rate (5-3/8%). At the time, we had a lot of equity in the house so we borrowed against it in order to build an addition.

After we were finished, we had a significant amount of money left over, which is currently sitting in “callable” CDs. The CDs are collecting an average of 5.25% APY. I’ve been calling this our “emergency fund”. Doing the math, you’ll see that I’m losing 0.125% on this money (5.375% mortgage rate - 5.25% CD interest).

My financial planner recommended putting it back into the mortgage. I’m leaning more towards investing it (in index funds or something else).

• If I leave the money where it is, I’m losing money.
• If I plonk down this entire lump sum on my mortgage right now, it takes ten years off the loan, but it means I have no emergency fund.
• If I invest this money at an average return rate of just 9% for the 26.5 years left on my mortgage, I end up with almost 10x the amount of money I have now! (Plus the money is easier to liquidate in case I need it.)

This seems like an easy choice, but it’s not. There’s no guarantee of a 9% return, but I feel that these numbers are fairly conservative and support the idea of investing the money vs. putting it back into the mortgage, which is why I’m very surprised at the recommendation to do so by my financial advisor. What’s the best choice here?

JD does an amazing job at presenting a bunch of resources and leaves it up to you to decide. If I were in the reader’s shoes, I’d invest the money. I’d feel comfortable holding onto a mortgage and increasing my worth in the long haul. What would you do if you were in their shoes?

Is It Better to Invest or to Prepay a Mortgage? at Get Rich Slowly