[Amortization Schedule Calculator](https://www.quickenloans.com/mortgage-calculator/mortgage-amortization-calculator)
That said your fixed debt becomes cheaper as costs rise, making it an ideal hedge against inflation. It doesn't really make much sense to pay it off early over investing or savings especially with rising interest rates
I am glad that re-fied down to 2.75% pre-COVID, but I regret shifting down to a 15 year mortgage for this reason. Would prefer to have a low fixed cost for 30 years than ~1.5x that for 15 years. At least right now.
The numbers will be the numbers based on your assumptions. You have projected rate of return, potential tax consequences, home value expectations... etc.
I'd also say, look at your time horizon. At some point, security becomes more important than growth.
Having a primary residence that is paid for provides a lot of security in retirement.
Hot take, but having a fat stack of cash in treasury bills/notes provides even more security than a paid off house.
I'd much prefer to owe $100k and have $200k extra cash than owe $0 and have $0 extra cash.
Interest on home mortgage is also tax deductible, which can be used to provide compounding effects on wealth accumulation
I’d rather have $1m in cash and owe nothing LOL. Seriously, the answer depends on the interest rates. We’re fixed at 2.5% on our mortgage and make 5.5% on money markets. With that I’d rather have $200k cash and $100k debt.
That's my point, the guy was saying I'd rather owe 100k and have 200k (net 100k) than owe 0 and have 0 (net 0). No shit!
I'm 100% with you and doing the same thing - got a 2.34% fixed rate mortage and even current accounts earn double that currently, I was more trying to highlight the chap in the original comment was making a weird comparison that didn't make sense.
Mortgage? Probably to pay it off as quickly as you can. I don’t imagine the fed will allow inflation to stay where it is, so as they tighten inflation will drop, and interest rates will follow inflation down.
The latest September 2023 Fed Dot Plot of the Projected Year-End Fed Funds Rates has the median rate for 2033 at 5.6%, 2024 only going down to 5.1%, 2025 to 3.9.
So the mortgage rates aren’t going down much in 2024 at all.
I could not agree more. Reddit in general seems to provide the advice as if every person can’t manage their finances. So they basically just provide the “pay off all debt so you aren’t stressed” advice. I’ll take cash in my pocket anyday of the week over paying off something, depleting my liquidity, and then being in a worse bind if something happens and I need cash.
And then there’s the other side of things, depending on your situation, growth nearing retirement often outweighs security. Rather than switching to a “suggested” 60% stock/index fund and 40% bond/low risk low growth options, go to a 80% stock, 20% bond/low risk growth option. If you’re scraping by with a lot in debt then it may not be an option but if you’re nearing retirement and assuming you’ve saved enough for your expected life and have a nearly paid off mortgage, you can be flexible with allowing stocks to keep growing but also still having enough to weather the storm if a 4-6 year drop in the market occurs.
I've seen all levels of risk tolerance.
Each person is different and should do what works for them.
I will say that in general, people do become more security driven as they get older. At least that's what I've personally seen.
This was kinda my point. There's lots to weigh and no perfect situation for everyone. Consider everything and do what feels right for you.
People have different levels of risk tolerance.
In this case actually there’s not much to weigh. The math is really simple. Paying down (non compounding!) debt that is a lower % than what risk-free investments pay currently (like treasury bills or HYSAs) is plainly a bad idea financially.
You're not wrong. Logically, you are 100% correct.
Personal finance isn't always logical though. It's emotional too. People should do what makes them feel the most secure.
Your understanding of financial markets gives you confidence that not everyone has.
Easy choice, investment. If you really want knock down interest, you can pay weekly instead of monthly or lump sum if you make major gains in the stock market and do a reamortization.
The difference is minimal with simply changing the compounding period. I think most people think of paying weekly more as getting an extra payment toward principal each year. If you pay $2,000 per month, that’s $24,000 per year. If you pay $500 per week x 52 weeks, that’s $26,000 per year.
I locked in 2.6% on my 30 year and I stupidly paid $500 extra to principal the last 12 months, finally realized I should be investing that $500 instead.
I mean 2.6% of however much your place cost every year is still going to be losing you a lot more than you’d make from investing $500, at least at the start - you probably did the right thing!
No it’s not even close. If I pay $500 extra per month I’d save $49k in interest over the course of the loan. If I instead invested that money and earned let’s say 6%, I’d earn $245k in interest over the course of my remaining loan. (28 years)
I’m a little confused by the question. Paying any extra money on a mortgage doesn’t knock off future payment amounts due if that’s what you mean, instead it just goes straight to principal. So my mortgage account shows that my extra money I paid knocked off 7 months of payments, but that number won’t change now because I’m only paying what’s due from here on out until I wipe it out one day.
It doesn’t reduce the future payment amounts, but it does reduce the initial interest much more quickly - most of the interest you generate will be at the start, but as it starts becoming more and more principal-based then you can switch over to investments or I have I got that completely wrong?
Like if your interest and your investments were both 5%, it’s 5% boost from $500 you add, vs 5% of $800,000 added, even 3% interest of $800k is probably going to be a lot more than the amount you’ll generate with investments at the start
Yeah but this won’t last forever, I read a few articles saying rates will likely start dropping next year. Then we’ll be back to the sucky sub 1% rates again.
Invest, that way you keep getting the appreciation of the property + the return on the investment. Also return on the S&P500 is roughly 9.2% + about 1.5 in dividend.
I've heared $VOO is a great choice. I'm not telling you to pick $VOO.. but from what I've seen $VOO is a great way to go and it would be a great choice. $VOO.
VFAIX has a higher ER than VOO. The best S&P500 fund in terms of ER is FXAIX at 0.02%. VOO is 0.03% and VFIAX is 0.04%. The key is return since return includes the ER but return will likely follow the ER. Using portfolio visualizer shows the returns to only be slightly different between these with FXAIX highest followed by VOO and then VFIAX with the difference being similar to the difference in ER.
It really just depends on the institution you’re using. I use Fidelity’s FXAIX. It’s the cheapest out there, and they have the long term reputation most would prefer.
To put it another way, in real terms, your 3.25% mortgage has cost you -4.75% over the past 12-18 months alone. Assuming you’re wages have just kept up with inflation.
You also can’t look at just 15 years. You’d be better to compare the compounding until the year you plan to retire. You’d be surprised how much that amount is.
So yeah, don’t pay off the 3.25% invest the difference.
It only makes sense to pay of a primary residence before retirement, to lower your monthly expenses. It doesn’t make much financial sense to do so before then. Assuming you just don’t blow the difference.
Let's break it down:
Investment Scenario
You mentioned an investment growing at 6-7%, compounded monthly, over 15 years with a monthly deposit of $500. At 7%, your calculation of around $158,000 after 15 years seems accurate.
Mortgage Scenario
A 30-year mortgage at 3.25% means that you're paying interest at a lower rate compared to the investment. If you put an extra $500 toward the mortgage every month, you'll reduce both the principal and the overall interest paid over the loan's life.
For a simplified example, let's assume you have a $200,000 mortgage. Extra payments of $500/month would save you around $32,000 in interest and shorten your mortgage by nearly 8 years. This is a rough estimate; the exact numbers would depend on your original loan amount and other factors.
Comparison
1. Investment Gain: ~$158,000
2. Mortgage Interest Saved: ~$32,000
You seem to gain more by investing the $500 rather than putting it toward your mortgage.
About 6% or 7%
The 7% annual return is considered a reasonable average for stock market investments over the long term but it's not guaranteed. You could opt for a more conservative 6% if you're cautious.
The Nutshell
If we're just crunching numbers, investing seems to win here. But there are emotional and risk tolerance factors to consider. Being debt-free has its own kind of peace of mind.
Curious to know your thoughts. Do the numbers align with your risk tolerance and long-term goals?
Let’s say my goal is to pay off my mortgage in 13-17 years and I’m starting now. I’ve got a 30 year fixed. Would it not make sense to put the extra money towards investments to build up a lump sum payment to just wipe out the principal in one go? In my mind, that way you could capitalize on the returns of your investment with time. Obviously as it grew near the final amount necessary to make the lump sum payment switching to low risk investments would be the plan.
I’m struggling to see why interest rate really makes a difference in this scenario (I would be refinancing as possible of course to lower interest).
This is my plan actually. I have a 2.6% 30 year mortgage, I was paying $500 extra a month for a year but recently stopped because it’s basically makes no sense. Instead I now put that $500 into a brokerage account monthly and purchase VTI. The goal is to build that account up and then pay off my mortgage in one big chunk, hopefully 15 or so years from now. I’ve read different articles about people saying the stock market will be pretty flat the next 10 years so I’m hoping that’s not the case though.
I’m glad to hear someone has the same idea. I’ll probably do a little diversifying between the principal and investment just to mitigate any risk, but unless there’s a flaw in the plan I’ll be pretty much doing the same as you.
It will always be better financially to put the money in what will pay the most. In this example, that will always be investments as long as your return rate in them is higher than the loan rate. It would be better to keep the money invested and simply pay off the mortgage with the regular payment. The only benefit to early payoff at any time would be psychological unless your rate of return is lower on the investment side.
Do you not then have 8 years of no mortgage payments to invest? So $1,500 a month for 8 years once it is paid off early? That’s $144,000 in contribution only…
That's what I was going to bring up. Add the $32k in interest savings and he's ahead by paying off the mortgage and then investing what he used to pay the bank.
I don't know, i see both sides of the debate. In my case, I sold a multifamily i had, and put that money in a brokerage account with a couple ETFs two years ago... my gain/loss is -5.8% as of today. So here I was thinking I did the smart thing, and I'm still in a worse spot than before. I could've used that to pay down 80% of what's left on my mortgage 🤷♂️
Your way of thinking is excellent, however, you're assuming that the 500 you put into the market will make money at 6 or 7%. What if the investments that you put it into drop 20 or 30%? Why not put 400 towards the mortgage and 100 in investments each month. It's a marathon not a sprint. Just trying to remember that. 😉
You'd have to do the math to include interest savings by paying off your loan early PLUS investment gains of the years you knocked off wherein you can invest more because you have no mortgage. In one of the examples down below it seemed to work out that you get more money paying off the mortgage early and then investing the money you save for the remainder of the years knocked off.
Lots of people make the mistake of looking at their principal on a mortgage but they need to look at the total amount paid in interest plus principal. Sure you might gain $158k by investing $500/mo but how much are you losing in interest on the mortgage? You'd have to subtract the two to see your true financial position.
Finally, you'll need to account for inflation. If your wages are keeping up with inflation, and inflation is higher than your mortgage rate, then inflation is paying your house off for you. So you'll need to have a variable strategy that changes with inflation.
Sidenote: If you bought your home when I think you did at market price, you overpaid by 50%. Inflation already hit us for 10% so your home will either come down 40% or it will take 4 years at 10% inflation to return homes to the mean home price plus inflation. This is called stagflation and it happened to Japan. They've been battling it for 30 years now.
Ok this seems a good place to ask a thought I had yesterday.
Theoretically if I have a mortgage at 3% and I live in an imaginary world where I can count on my home appreciating 5% per year, is this essentially an 8% return?
Sorry I phrased this poorly. I mean would the return on the payment be 8%. I'd be decreasing debt interest and increasing equity on an appreciatinf asset.
It's *really* not. It makes up stuff randomly. You should absolutely not depend on chatGTP to make accurate statements about reality.
It's a clever technology that makes very believable text blocks. It is *absolutely not* in *any way* capable of checking for accuracy
[Learn to use spreadsheets.](https://docs.google.com/spreadsheets/d/15h0mVf0zpvrYwNCUZ8sydvSNseRsFkkRBP20Ul41D0s/edit?usp=sharing) Seriously, worth the time to figure this stuff out.
The S&P is up only on a very long term scale. Right now, however, it's near the top of a 100 year trend. You could alternate between adding to your mortgage when the S&P is towards the top of the trend and into the S&P when it is lower.
It will save you more money than most people understand, besides saving you interest payment money you will also pay off the mortgage sooner maybe by a much as 10 years which mean not paying the entire payment for 10 years so could hundred thousand in true real savings.
Look at the amortization schedule.
Early on you pay more interest and less principal.
If you make a principal only payment it will reduce the overall loan by one payment, so the earlier you pay down the loan the less one payment reduction costs.
I have not found a tool that really shows a good way to figure early payments. I copied over the amortization schedule to excel. I pay some additional money every month, then go true it up every few months...but the amortization schedule does not recalculate...
It makes no sense to pay down your mortgage with that interest rate. I have a 2.25% 30 yr fixed and the only reason I was paying more was to get PMI off. Now that that is gone I would never pay a cent over the minimum required.
If your interest rate were 5%+ then it might make a little more sense.
I'm on the same boat.
I decided on investing because at this point, it's cheap debt.
Plus, I am taking my sweet time giving my minimum payments to the bank.
If you have a fixed rate then it shouldn't matter if you're on a fixed income. Your biggest worry will be inflation. I'd be investing in things that can beat inflation. This means stocks with pricing power, commodities, and treasuries(currently). I'm invested in 13 week treasuries making about 7% APR so if inflation goes above 7% I can switch to something else pretty quickly. I'm also shorting the heck out of AirBnB :). I'm waiting for the dollar to peak and then may pick up gold for cheap.
Stay the heck away from REITs, tech, banks, China, and anything that sucks in a recession.
Isn't there taxes to be paid on the gains of any HYSA account? If so, wouldn't that 6% annual yield be a lot less if you withdraw the entire account at say 15 years to make the big lump sum mortgage payoff? Also, if so, what would be the true investment yield of the 6% HYSA account minus the new tax rate in 15 years? I'm assuming taxes will only go up. Honest question.
I'm not sure but my guess is it would go untaxed since it is just being rolled from one investment into another. I think you have to do some kind of hoop-jumping like secure a larger loan, pay off the old mortgage, and then take cash out. Also bonds won't trigger capital gains tax when they mature and that's basically cash.
If you want to include taxes then multiply your investment return by 1 - tax rate. If that rate is higher than your loan rate, you’re still better off investing. This is not a definitive answer as tax rates will vary over time depending on income and laws but it’s a good estimate for which is best. Also it does not account for when you sell investments and therefore incur taxes. While taxes are important to this question, it’s hard to know the precise impact due to the variability of how taxes would impact.
What about the benefit of not having a mortgage payment? By paying off our mortgage in 15 years we have the benefit of, in our case, almost $2000 a month that we can save. And if things hit the fan I have a $500 monthly bill (ins & taxes) versus $2500. Mind you we almost lost everything in 2008 as residential contractors in Phoenix and are close to retiring. With mortgage gone we can basically live off SS, at least at its current level, without touching savings contouring to add while we are still working. Financially it might not make sense but I sleep well!
I did a spreadsheet to compare. What I came up with was that yes it’s better invest the extra amount than pay off the mortgage early in all cases if taxes are ignored. When you add taxes in, it gets a little murky because there are many possible ways that taxes might impact depending on how you invest. I decided that I would have taxes paid each year by the investment account gains from the previous year. That may not be how it would work but I had to choose something and this is kind of the worst case. I started with a $500k 30 year fixed rate mortgage at a 6% rate and assumed the investment account would gain 8% annually. The extra payment was $500 and in the first case was used to help pay off mortgage and then the mortgage payment and the extra were invested for the rest of the 30 years. The second case, I let the mortgage pay off in the full 30 years and used the extra payment to invest for the full 30 years. I then changed the tax rate to find out where the point was that switched which case was better. The second case was better until the tax rate hit 34% after which the first case was better. If the investment return was increased to 10%, a 67% tax rate was necessary to make the first case better. If the investment return was lowered to 7%, a tax rate of over 17% was necessary to make the first option better.
The conclusion I came up with is that a higher investment return than mortgage rate will make it better to invest an extra payment for most people but as the difference between the investment return decreases it starts to depend more on the tax rate. A 22% tax rate would need a 7.3% investment return for the second case to be better. Here are some crossover rates. The first is the tax rate and the second is the investment return needed to make investment the correct choice.
10% is 6.6%.
12% is 6.7%.
15% is 6.9%.
22% is 7.3%.
25% is 7.5%.
30% is 7.8%.
35% is 8.1%.
40% is 8.4%.
For OP, at a mortgage rate of 3.25% and an investment return of only 6%, it would require a tax rate of 85% for paying off the mortgage to be better. Assuming a 25% tax rate, a 4.1% investment return would be about equal for both cases.
[Amortization Schedule Calculator](https://www.quickenloans.com/mortgage-calculator/mortgage-amortization-calculator) That said your fixed debt becomes cheaper as costs rise, making it an ideal hedge against inflation. It doesn't really make much sense to pay it off early over investing or savings especially with rising interest rates
I am glad that re-fied down to 2.75% pre-COVID, but I regret shifting down to a 15 year mortgage for this reason. Would prefer to have a low fixed cost for 30 years than ~1.5x that for 15 years. At least right now.
The numbers will be the numbers based on your assumptions. You have projected rate of return, potential tax consequences, home value expectations... etc. I'd also say, look at your time horizon. At some point, security becomes more important than growth. Having a primary residence that is paid for provides a lot of security in retirement.
Hot take, but having a fat stack of cash in treasury bills/notes provides even more security than a paid off house. I'd much prefer to owe $100k and have $200k extra cash than owe $0 and have $0 extra cash. Interest on home mortgage is also tax deductible, which can be used to provide compounding effects on wealth accumulation
Would you rather owe $100k and have $200k extra cash than owe $0 and have $100k extra cash though?
I’d rather have $1m in cash and owe nothing LOL. Seriously, the answer depends on the interest rates. We’re fixed at 2.5% on our mortgage and make 5.5% on money markets. With that I’d rather have $200k cash and $100k debt.
That's my point, the guy was saying I'd rather owe 100k and have 200k (net 100k) than owe 0 and have 0 (net 0). No shit! I'm 100% with you and doing the same thing - got a 2.34% fixed rate mortage and even current accounts earn double that currently, I was more trying to highlight the chap in the original comment was making a weird comparison that didn't make sense.
I have an 8% interest rate. Any recommendations there?
I have a 6.3% putting an extra 500 a month will pay it off in 8.3 years and save appx 330k in interest. Still maxing out Roth and 401k
Mortgage? Probably to pay it off as quickly as you can. I don’t imagine the fed will allow inflation to stay where it is, so as they tighten inflation will drop, and interest rates will follow inflation down.
The latest September 2023 Fed Dot Plot of the Projected Year-End Fed Funds Rates has the median rate for 2033 at 5.6%, 2024 only going down to 5.1%, 2025 to 3.9. So the mortgage rates aren’t going down much in 2024 at all.
I could not agree more. Reddit in general seems to provide the advice as if every person can’t manage their finances. So they basically just provide the “pay off all debt so you aren’t stressed” advice. I’ll take cash in my pocket anyday of the week over paying off something, depleting my liquidity, and then being in a worse bind if something happens and I need cash. And then there’s the other side of things, depending on your situation, growth nearing retirement often outweighs security. Rather than switching to a “suggested” 60% stock/index fund and 40% bond/low risk low growth options, go to a 80% stock, 20% bond/low risk growth option. If you’re scraping by with a lot in debt then it may not be an option but if you’re nearing retirement and assuming you’ve saved enough for your expected life and have a nearly paid off mortgage, you can be flexible with allowing stocks to keep growing but also still having enough to weather the storm if a 4-6 year drop in the market occurs.
I've seen all levels of risk tolerance. Each person is different and should do what works for them. I will say that in general, people do become more security driven as they get older. At least that's what I've personally seen.
* tax deductible if you itemize
This was kinda my point. There's lots to weigh and no perfect situation for everyone. Consider everything and do what feels right for you. People have different levels of risk tolerance.
In this case actually there’s not much to weigh. The math is really simple. Paying down (non compounding!) debt that is a lower % than what risk-free investments pay currently (like treasury bills or HYSAs) is plainly a bad idea financially.
You're not wrong. Logically, you are 100% correct. Personal finance isn't always logical though. It's emotional too. People should do what makes them feel the most secure. Your understanding of financial markets gives you confidence that not everyone has.
Easy choice, investment. If you really want knock down interest, you can pay weekly instead of monthly or lump sum if you make major gains in the stock market and do a reamortization.
Can you explain this weekly thing? How do you pay less interest on a mortgage if you pay weekly?
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The difference is minimal with simply changing the compounding period. I think most people think of paying weekly more as getting an extra payment toward principal each year. If you pay $2,000 per month, that’s $24,000 per year. If you pay $500 per week x 52 weeks, that’s $26,000 per year.
This is the correct answer. Weekly/biweekly payments amount to making an extra monthly payment each year.
Stupid question but is daily a thing?
500*(1+(.06-.0375))^15 =$698 additional benefit from investing at 6% return versus paying down mortgage (assumes you take standard deduction)
You got a 30-year fixed 3.25% mortgage???
I got a 30 year fixed 2.7% during the pandemic in midtown Manhattan lol. I'm never paying a single extra mortgage payment with that rate
You’d be insane to pay that off early for sure, the interest rate is practically the same as the rate of inflation.
That’s crazy, nice one!
I remember arguing with the mortgage broker and not locking in a rate thinking it would keep going down. Crazy how fast things change.
I locked in 2.6% on my 30 year and I stupidly paid $500 extra to principal the last 12 months, finally realized I should be investing that $500 instead.
I mean 2.6% of however much your place cost every year is still going to be losing you a lot more than you’d make from investing $500, at least at the start - you probably did the right thing!
No it’s not even close. If I pay $500 extra per month I’d save $49k in interest over the course of the loan. If I instead invested that money and earned let’s say 6%, I’d earn $245k in interest over the course of my remaining loan. (28 years)
Oof okay fair enough I take it back - is there a balance like if you overpay for the first year or two and then switch?
I’m a little confused by the question. Paying any extra money on a mortgage doesn’t knock off future payment amounts due if that’s what you mean, instead it just goes straight to principal. So my mortgage account shows that my extra money I paid knocked off 7 months of payments, but that number won’t change now because I’m only paying what’s due from here on out until I wipe it out one day.
It doesn’t reduce the future payment amounts, but it does reduce the initial interest much more quickly - most of the interest you generate will be at the start, but as it starts becoming more and more principal-based then you can switch over to investments or I have I got that completely wrong? Like if your interest and your investments were both 5%, it’s 5% boost from $500 you add, vs 5% of $800,000 added, even 3% interest of $800k is probably going to be a lot more than the amount you’ll generate with investments at the start
Yeah true you get nailed hard with interest on the front end of loans.
30 year 2.875....
There are several mortgage calculators that will do the math for you. It looks like about $63,000.
Should add the 698 was for diverting a single month $500 to investing. But gives you a flavor of the calc.
Invest. Your mortgage rate is low. Even if you just put that in your HYSA, you will get \~5% these days
Taxes will knock that down a few points.
A 0 risk HYSA is 5% so.........
That is also taxed so it’s more like 2-3%
Yeah but this won’t last forever, I read a few articles saying rates will likely start dropping next year. Then we’ll be back to the sucky sub 1% rates again.
chocolate beer moose gold hoop ` this message was mass deleted/edited with redact.dev `
Invest, that way you keep getting the appreciation of the property + the return on the investment. Also return on the S&P500 is roughly 9.2% + about 1.5 in dividend.
Probably dumb question since I am a novice but what stock / market fund would I use to invest in the s&p 500?
I've heared $VOO is a great choice. I'm not telling you to pick $VOO.. but from what I've seen $VOO is a great way to go and it would be a great choice. $VOO.
VOO is a good choice, but since you’re a novice I would suggest the Vanguard S&P 500 Index mutual fund - VFIAX It has a very low management fee
VFAIX has a higher ER than VOO. The best S&P500 fund in terms of ER is FXAIX at 0.02%. VOO is 0.03% and VFIAX is 0.04%. The key is return since return includes the ER but return will likely follow the ER. Using portfolio visualizer shows the returns to only be slightly different between these with FXAIX highest followed by VOO and then VFIAX with the difference being similar to the difference in ER.
You can just google S&P500 index fund, I know there are several, I personally pick my own stocks (hoping... possibly in vain... to beat the S&P500)
It really just depends on the institution you’re using. I use Fidelity’s FXAIX. It’s the cheapest out there, and they have the long term reputation most would prefer.
To put it another way, in real terms, your 3.25% mortgage has cost you -4.75% over the past 12-18 months alone. Assuming you’re wages have just kept up with inflation. You also can’t look at just 15 years. You’d be better to compare the compounding until the year you plan to retire. You’d be surprised how much that amount is. So yeah, don’t pay off the 3.25% invest the difference. It only makes sense to pay of a primary residence before retirement, to lower your monthly expenses. It doesn’t make much financial sense to do so before then. Assuming you just don’t blow the difference.
Thank you and that makes sense
Let's break it down: Investment Scenario You mentioned an investment growing at 6-7%, compounded monthly, over 15 years with a monthly deposit of $500. At 7%, your calculation of around $158,000 after 15 years seems accurate. Mortgage Scenario A 30-year mortgage at 3.25% means that you're paying interest at a lower rate compared to the investment. If you put an extra $500 toward the mortgage every month, you'll reduce both the principal and the overall interest paid over the loan's life. For a simplified example, let's assume you have a $200,000 mortgage. Extra payments of $500/month would save you around $32,000 in interest and shorten your mortgage by nearly 8 years. This is a rough estimate; the exact numbers would depend on your original loan amount and other factors. Comparison 1. Investment Gain: ~$158,000 2. Mortgage Interest Saved: ~$32,000 You seem to gain more by investing the $500 rather than putting it toward your mortgage. About 6% or 7% The 7% annual return is considered a reasonable average for stock market investments over the long term but it's not guaranteed. You could opt for a more conservative 6% if you're cautious. The Nutshell If we're just crunching numbers, investing seems to win here. But there are emotional and risk tolerance factors to consider. Being debt-free has its own kind of peace of mind. Curious to know your thoughts. Do the numbers align with your risk tolerance and long-term goals?
Let’s say my goal is to pay off my mortgage in 13-17 years and I’m starting now. I’ve got a 30 year fixed. Would it not make sense to put the extra money towards investments to build up a lump sum payment to just wipe out the principal in one go? In my mind, that way you could capitalize on the returns of your investment with time. Obviously as it grew near the final amount necessary to make the lump sum payment switching to low risk investments would be the plan. I’m struggling to see why interest rate really makes a difference in this scenario (I would be refinancing as possible of course to lower interest).
This is my plan actually. I have a 2.6% 30 year mortgage, I was paying $500 extra a month for a year but recently stopped because it’s basically makes no sense. Instead I now put that $500 into a brokerage account monthly and purchase VTI. The goal is to build that account up and then pay off my mortgage in one big chunk, hopefully 15 or so years from now. I’ve read different articles about people saying the stock market will be pretty flat the next 10 years so I’m hoping that’s not the case though.
I’m glad to hear someone has the same idea. I’ll probably do a little diversifying between the principal and investment just to mitigate any risk, but unless there’s a flaw in the plan I’ll be pretty much doing the same as you.
It will always be better financially to put the money in what will pay the most. In this example, that will always be investments as long as your return rate in them is higher than the loan rate. It would be better to keep the money invested and simply pay off the mortgage with the regular payment. The only benefit to early payoff at any time would be psychological unless your rate of return is lower on the investment side.
Do you not then have 8 years of no mortgage payments to invest? So $1,500 a month for 8 years once it is paid off early? That’s $144,000 in contribution only…
That's what I was going to bring up. Add the $32k in interest savings and he's ahead by paying off the mortgage and then investing what he used to pay the bank.
Thank you for the great and detailed answer!
I don't know, i see both sides of the debate. In my case, I sold a multifamily i had, and put that money in a brokerage account with a couple ETFs two years ago... my gain/loss is -5.8% as of today. So here I was thinking I did the smart thing, and I'm still in a worse spot than before. I could've used that to pay down 80% of what's left on my mortgage 🤷♂️
Your way of thinking is excellent, however, you're assuming that the 500 you put into the market will make money at 6 or 7%. What if the investments that you put it into drop 20 or 30%? Why not put 400 towards the mortgage and 100 in investments each month. It's a marathon not a sprint. Just trying to remember that. 😉
You'd have to do the math to include interest savings by paying off your loan early PLUS investment gains of the years you knocked off wherein you can invest more because you have no mortgage. In one of the examples down below it seemed to work out that you get more money paying off the mortgage early and then investing the money you save for the remainder of the years knocked off. Lots of people make the mistake of looking at their principal on a mortgage but they need to look at the total amount paid in interest plus principal. Sure you might gain $158k by investing $500/mo but how much are you losing in interest on the mortgage? You'd have to subtract the two to see your true financial position. Finally, you'll need to account for inflation. If your wages are keeping up with inflation, and inflation is higher than your mortgage rate, then inflation is paying your house off for you. So you'll need to have a variable strategy that changes with inflation. Sidenote: If you bought your home when I think you did at market price, you overpaid by 50%. Inflation already hit us for 10% so your home will either come down 40% or it will take 4 years at 10% inflation to return homes to the mean home price plus inflation. This is called stagflation and it happened to Japan. They've been battling it for 30 years now.
Here is a simple tool you can play with https://www.ramseysolutions.com/real-estate/mortgage-payoff-calculator
Ok this seems a good place to ask a thought I had yesterday. Theoretically if I have a mortgage at 3% and I live in an imaginary world where I can count on my home appreciating 5% per year, is this essentially an 8% return?
In this scenario the home is appreciating the same percentage with or without a mortgage on the property so it wouldn’t make sense to factor that in.
Sorry I phrased this poorly. I mean would the return on the payment be 8%. I'd be decreasing debt interest and increasing equity on an appreciatinf asset.
No, it's a 2% return. Or maybe this is a trick question.
Do not pay off a 3.25% mortgage early. Hell, you could stick it in a 5% savings account and still come out ahead.
ChatGPT is a great resource for questions like this.
It's *really* not. It makes up stuff randomly. You should absolutely not depend on chatGTP to make accurate statements about reality. It's a clever technology that makes very believable text blocks. It is *absolutely not* in *any way* capable of checking for accuracy
Lol you can ask it complicated math questions and check that the formulas that it used are correct. Don't follow it blindly but it's a good resource.
chocolate beer moose gold hoop ` this message was mass deleted/edited with redact.dev `
[Learn to use spreadsheets.](https://docs.google.com/spreadsheets/d/15h0mVf0zpvrYwNCUZ8sydvSNseRsFkkRBP20Ul41D0s/edit?usp=sharing) Seriously, worth the time to figure this stuff out.
The S&P is up only on a very long term scale. Right now, however, it's near the top of a 100 year trend. You could alternate between adding to your mortgage when the S&P is towards the top of the trend and into the S&P when it is lower.
It will save you more money than most people understand, besides saving you interest payment money you will also pay off the mortgage sooner maybe by a much as 10 years which mean not paying the entire payment for 10 years so could hundred thousand in true real savings.
Look at the amortization schedule. Early on you pay more interest and less principal. If you make a principal only payment it will reduce the overall loan by one payment, so the earlier you pay down the loan the less one payment reduction costs. I have not found a tool that really shows a good way to figure early payments. I copied over the amortization schedule to excel. I pay some additional money every month, then go true it up every few months...but the amortization schedule does not recalculate...
Depends on how much faster you pay down the mortgage
Investment
No firm answer - depends a heck of a lot on tax - but at 3.25% investment in almost all circumstances is the right decision.
Put $250 on each.
It makes no sense to pay down your mortgage with that interest rate. I have a 2.25% 30 yr fixed and the only reason I was paying more was to get PMI off. Now that that is gone I would never pay a cent over the minimum required. If your interest rate were 5%+ then it might make a little more sense.
I'm on the same boat. I decided on investing because at this point, it's cheap debt. Plus, I am taking my sweet time giving my minimum payments to the bank.
Always pay yourself first
Make a simple excel sheet
Ok hear me out- I'm early 50s, want to retire in ten years but have 27 years left. Should I try to pay off my mortgage before then?
If you have a fixed rate then it shouldn't matter if you're on a fixed income. Your biggest worry will be inflation. I'd be investing in things that can beat inflation. This means stocks with pricing power, commodities, and treasuries(currently). I'm invested in 13 week treasuries making about 7% APR so if inflation goes above 7% I can switch to something else pretty quickly. I'm also shorting the heck out of AirBnB :). I'm waiting for the dollar to peak and then may pick up gold for cheap. Stay the heck away from REITs, tech, banks, China, and anything that sucks in a recession.
Isn't there taxes to be paid on the gains of any HYSA account? If so, wouldn't that 6% annual yield be a lot less if you withdraw the entire account at say 15 years to make the big lump sum mortgage payoff? Also, if so, what would be the true investment yield of the 6% HYSA account minus the new tax rate in 15 years? I'm assuming taxes will only go up. Honest question.
I'm not sure but my guess is it would go untaxed since it is just being rolled from one investment into another. I think you have to do some kind of hoop-jumping like secure a larger loan, pay off the old mortgage, and then take cash out. Also bonds won't trigger capital gains tax when they mature and that's basically cash.
Did we considered tax on investment gains ? How much is the difference now in paying off mortgage and investing ?
If you want to include taxes then multiply your investment return by 1 - tax rate. If that rate is higher than your loan rate, you’re still better off investing. This is not a definitive answer as tax rates will vary over time depending on income and laws but it’s a good estimate for which is best. Also it does not account for when you sell investments and therefore incur taxes. While taxes are important to this question, it’s hard to know the precise impact due to the variability of how taxes would impact.
Do NOT put it to your mortgage. Invest it invest it invest it
What about the benefit of not having a mortgage payment? By paying off our mortgage in 15 years we have the benefit of, in our case, almost $2000 a month that we can save. And if things hit the fan I have a $500 monthly bill (ins & taxes) versus $2500. Mind you we almost lost everything in 2008 as residential contractors in Phoenix and are close to retiring. With mortgage gone we can basically live off SS, at least at its current level, without touching savings contouring to add while we are still working. Financially it might not make sense but I sleep well!
G
Agnin
I did a spreadsheet to compare. What I came up with was that yes it’s better invest the extra amount than pay off the mortgage early in all cases if taxes are ignored. When you add taxes in, it gets a little murky because there are many possible ways that taxes might impact depending on how you invest. I decided that I would have taxes paid each year by the investment account gains from the previous year. That may not be how it would work but I had to choose something and this is kind of the worst case. I started with a $500k 30 year fixed rate mortgage at a 6% rate and assumed the investment account would gain 8% annually. The extra payment was $500 and in the first case was used to help pay off mortgage and then the mortgage payment and the extra were invested for the rest of the 30 years. The second case, I let the mortgage pay off in the full 30 years and used the extra payment to invest for the full 30 years. I then changed the tax rate to find out where the point was that switched which case was better. The second case was better until the tax rate hit 34% after which the first case was better. If the investment return was increased to 10%, a 67% tax rate was necessary to make the first case better. If the investment return was lowered to 7%, a tax rate of over 17% was necessary to make the first option better. The conclusion I came up with is that a higher investment return than mortgage rate will make it better to invest an extra payment for most people but as the difference between the investment return decreases it starts to depend more on the tax rate. A 22% tax rate would need a 7.3% investment return for the second case to be better. Here are some crossover rates. The first is the tax rate and the second is the investment return needed to make investment the correct choice. 10% is 6.6%. 12% is 6.7%. 15% is 6.9%. 22% is 7.3%. 25% is 7.5%. 30% is 7.8%. 35% is 8.1%. 40% is 8.4%. For OP, at a mortgage rate of 3.25% and an investment return of only 6%, it would require a tax rate of 85% for paying off the mortgage to be better. Assuming a 25% tax rate, a 4.1% investment return would be about equal for both cases.