I ran a model that measured the difference between making extra payments to a mortgage to pay it off early and making the minimum payment and letting the mortgage go the full term. It also assumes that the one letting the mortgage go the full term, invests an amount equivalent to the extra payment made by the one paying the mortgage off early; and that the one paying off the mortgage early begins to invest an amount equal to his mortgage payment plus the extra amount applied to principal as soon as the mortgage is fully paid off. Therefore, both sides of the equation have the exact same out-of-pocket monthly expense for the full 30-year period. My assumptions were:
Tax Bracket: 30%
Market Return: 11%
Mortgage Rate: 6%
Principal Balance: $300,000
Mortgage Term: 30 Years
Extra Payment/Mo: $899 (or an extra 50%/mo)
Here are the results of the one who lets the mortgage go full term:
Interest Expense: ($347,514.57)
Tax Savings: $104,254.37
Investment Return: $2,522,176.92
Ending Balance: $2,278,917.72
And, here are the results of the one who pays off the mortgage early:
Interest Expense: ($139,175.62)
Tax Savings: $41,752.69
Investment Return: $1,485,569.51
Ending Balance: $1,388,146.58
I believe that the primary proponent to paying off a mortgage early is peace of mind. Believe me; I know how having debt can weigh down on your shoulders. But is that peace of mind worth $890,770.15? It very well could be.
I think the key in all of this is to make sure that, after you’ve signed up for that mortgage, there is a surplus of discretionary income with which you can do as you see fit. Otherwise, there will be a whole percentage of the population who are teetering on the edge, so the government won’t be able to raise interest rates, so the value of the dollar will continue to plummet, so the cost of oil will continue to skyrocket (among other reasons, such as increasing demand, and a fairly inelastic supply . . . . does three make a perfect storm?), so it costs me $4 for a gallon of gas and $12 for a hamburger. Oh wait, that already happened. I don’t know about your CPI, but mine’s not in check. (Would that be the DPI – Dean’s Price Index?)
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5 comments:
Peace of mind is one reason to prepay. Extra discretionary money is the primary reason not to, not extra investment. I think this is what this would look like in our house:
Interest Expense: ($347,514.57)
Tax Savings: $104,254.37
Investment Return: $0
Ending Balance: ($243,260.20)
Flip flops: 120
Board games: 85
now I am just more confused. so the non prepay actually comes away with more cash because he invests it rather than pays off debt.... can that be for real? all I know is for our current home loan we will pay close to a million dollars if I let it go full term. where do I sign up to balance that out in the end?
oh, and last check our investments are , where do I sign up for a guaranteed 11% return?
oh, and last check our investments are , where do I sign up for a guaranteed 11% return?
I wanted to say something snappy and funny to add to John's poke at the flip flops meaning that we have not money to invest...having trouble being snappy though, because John's board game shelf just collapsed in the closet and I'm picking up game pieces off his floor at the moment...
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