Should I sell stocks to pay off my mortgage?

Should I sell stocks to pay off my mortgage?

September 27, 2022

Q: We are very concerned about the losses in our investment accounts. Would it be a good strategy to take some money from our investments and pay off our mortgage? In one simple step, we would immediately reduce our exposure to the stock market and effectively earn the 3% we are currently paying on our loan. What are your thoughts?

A: Believe me—I understand your concern. The stock market feels like a financial black hole right now with little relief in sight. While I do not have enough information to give you a definitive answer for your specific situation, here are some things you might consider as you make your decision.

Don’t forget how fortunate you are to have a mortgage at such a low rate. Given the tax deductibility of mortgage interest, your 3 percent mortgage rate is really more like 2.3 percent. Current mortgage rates are well above 6 percent. I’m not generally a fan of borrowing money, but if you need to have some debt on your personal balance sheet, you will be hard pressed to match the mortgage you already have.

Compared to other long-term investments, selling stocks to pay off a 3 percent mortgage is not very attractive. For example, in today’s bond market, you can buy long-term U.S. Treasury bonds with yields close to 4 percent. Since U.S. Treasury bonds are subject to federal income tax but are exempt from state income tax, your after-tax yield will be slightly above 3 percent, quite a bit better than the 2.3 percent after-tax rate on the mortgage. Buying bonds will also give you better liquidity than paying off your mortgage. Once you pay off the mortgage, your money will be locked up in your home equity. If you buy a bond instead, you could always sell a portion of the bond to raise cash.

Your best long-term investment option, however, is a well-diversified portfolio of high-quality stocks. I know it may be hard to believe right now, but the stock market’s troubles are temporary. When the Federal Reserve starts to get the upper hand on inflation—and it eventually will—the stock market will turn around and deliver significantly better than a 3% annual return. In fact, the more the market drops right now, the better the returns you should expect in the future.

With this in mind, before you do anything else, I encourage you to take a careful look at your portfolio. Is it strong enough to weather the current financial storm? Is it resilient? Will it survive the Fed’s inflation fight and be able to participate when the market finds its footing again? There are three qualities that make a portfolio resilient.

First, a resilient portfolio is invested in high-quality assets. High-quality companies have the ability to withstand economic pressures that would doom junkier companies. Many investors learned the difference between quality and junk during the dot-com bust. Between March 2000 and November 2001, technology stocks of all kinds dropped precipitously. Some stocks, like Webvan and, simply evaporated. Other stocks, like Amazon, took huge hits (Amazon dropped more than 90% in the dot-com bust), but were strong enough to survive and eventually thrive. That’s resilience.

Second, a resilient portfolio is well-diversified. When the economy comes under severe stress, it is not always easy to know which companies will be strong enough to survive. As a result, you need diversification. A well-diversified portfolio has a large number of holdings across many different sectors. No single stock holding is large enough to sink the portfolio if that particular stock gets into trouble.

Third, a resilient portfolio is able to meet near-term withdrawals without having to sell stocks when the market is down. If you know you will need to withdraw funds from your portfolio within the next four years, consider investing that money in short-term bonds or CDs. But be careful. There is such a thing as being “too conservative.” Short-term investments may look safe, but they also leave you exposed to inflation.


Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., an independent wealth management firm in Monterey.   He welcomes questions you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to