Are Mortgages Best Investment?

AUSTIN - While paying down a mortgage is a good way to save interest over time, a new study found greater savings when extra cash is placed in a tax-deferred retirement account.

Researchers at the University of Texas at Austin and the University of Michigan's Ross School of Business were surprised to learn that households making extra payments on their mortgage (about 40%) may be better off investing in a 401(k) or 403(b) plan, the study said.

An employer-matched contribution made the results even more pronounced, highlighting that risk-averse homeowners who go for mortgage prepays rather than retirement accounts are leaving real money on the table.

The study used data from the Federal Reserve System's Survey of Consumer Finances and the investments were in conservative Treasury securities that may earn only 5%.

Still, researchers found that at least 38% of households would have earned 11 to 17 cents more on the dollar by investing in a 401(k) instead of prepaying the mortgage. That would result in additional savings of $1.5 billion a year, or almost $400 per household, according to the study.