Pay Off Mortgage?

[MassWineGuy]

Wow! I need to speak with a specialist.

 

[DriveInDriveOut]

Some really dumb math going on in here.

His mortgage interest rate is 3%.
Savings accounts are paying 5%.

It doesn't matter how many circles you go in, the math is set from the start.

 

[Ou812fu]

With a rate below three I'd pay it off as you go. How much of your mortgage payment is actually for the mortgage? If it's not an adjustable rate mortgage and you say it keeps going up means you are paying your insurance and taxes with it. Those are payments you're still going to have to make. If you're far enough along you're also probably not paying that much in interest per month. I know it feels good not to have a big debt payment every month, but with low rates and the fact you will still be working I'd let your retirement money keep growing.

Disclaimer: I'm not a financial advisor.

If your savings make a higher percentage then the home. Then make payments on the mortgage. If the interest is higher on the mortgage then the interest on the savings. Then you should pay the house off. Due to you are losing money each month.

 

[Up In Smoke]

The problem is everyone situation is different. You assumed this person had a 10 year mortgage. Most people have a 30 year mortgage and the beginning balance is going to be much higher than $120k. Therefore the P&I is going to be higher.

You example is very simple. All you are looking at is interest. You are ignoring the $1160/mo investment every month for 10 years that the person would be making by not having a mortgage now. There is also more that can be taken into account, but that will vary upon person to person and their situation.

if you pay off mortgage and invest that $1160/mo for 120 months @5% you will end up at $173k.
If you don't pay off mortgage and put $120k into an investment that will pay you 5% for 120 months you will end up at $182k
So you made $9k more over the 120 months for an average of $75/mo
Now you have to subtract out the $19k in mortgage interest you had to pay
Suddenly I am better off by $10k. The gap would be even wider because the mortgage amount would have been even higher meaning the $1160 monthly investment would be more and the interest would have been more than $19k.

Just a couple things you have wrong. A 30 note would have much lower P&I than $1160.00, but to compare apples to apples a 10 year time span seems fair. A mortgage is compounded daily, so again apples to apples, do that with the 120K. Lastly 120 payments of $1160.00 is 139K not 120K some your return is much lower.

 

[Up In Smoke]

Your compound interest on the 120K is wrong. It looks like you stopped at 8 years.

 

[59 Dano]

And be worse off than just investing the $120k to begin with.

I wouldn't be worse off at all.

Take a 5 year period, for example.

*Don't pay off the house
$120k at 5.5% gives me just under $157k at the end, minus whatever I paid in interest on my mortgage during that time.

*Pay off the house
I invest $2400 a month in something that generates an average annual gain of no less than 8%, giving me at least $176k at the end.

It immediately increases my net worth, gives me a higher yield, more liquidity, more money in the end, inflation is less of a concern, more options for my money, a stronger and more effective investing focus, I can adjust how my money is invested as needed, and I can afford to be more aggressive because there's absolutely no risk to my home and I have no mortgage payment.

This is so simple, the fact that you are arguing for clearing a very low interest loan is strange. I took you for smarter than that.

You are correct, it is very simple. Those of us who took these kinds of courses in college understand it very well.

If you want to eke out something from a 2% rate differential and simultaneously make house payments, go for it. I'd rather have no house payment and get some real bang for my buck.

 

[Up In Smoke]

I wouldn't be worse off at all.

Take a 5 year period, for example.

*Don't pay off the house
$120k at 5.5% gives me just under $157k at the end, minus whatever I paid in interest on my mortgage during that time.

*Pay off the house
I invest $2400 a month in something that generates an average annual gain of no less than 8%, giving me at least $176k at the end.

It immediately increases my net worth, gives me a higher yield, more liquidity, more money in the end, inflation is less of a concern, more options for my money, a stronger and more effective investing focus, I can adjust how my money is invested as needed, and I can afford to be more aggressive because there's absolutely no risk to my home and I have no mortgage payment.


You are correct, it is very simple. Those of us who took these kinds of courses in college understand it very well.

If you want to eke out something from a 2% rate differential and simultaneously make house payments, go for it. I'd rather have no house payment and get some real bang for my buck.

Your example makes little sense and doesn't use the numbers the MOD introduced.

 

[59 Dano]

The problem is everyone situation is different. You assumed this person had a 10 year mortgage. Most people have a 30 year mortgage and the beginning balance is going to be much higher than $120k. Therefore the P&I is going to be higher.

You example is very simple. All you are looking at is interest. You are ignoring the $1160/mo investment every month for 10 years that the person would be making by not having a mortgage now. There is also more that can be taken into account, but that will vary upon person to person and their situation.

if you pay off mortgage and invest that $1160/mo for 120 months @5% you will end up at $173k.
If you don't pay off mortgage and put $120k into an investment that will pay you 5% for 120 months you will end up at $182k
So you made $9k more over the 120 months for an average of $75/mo
Now you have to subtract out the $19k in mortgage interest you had to pay
Suddenly I am better off by $10k. The gap would be even wider because the mortgage amount would have been even higher meaning the $1160 monthly investment would be more and the interest would have been more than $19k.

Don't feel discouraged, 2% is a big deal to some people.

 

[59 Dano]

Your example makes little sense and doesn't use the numbers the MOD introduced.

I'm using the numbers the person I'm responding to used: $120k and a 5% CD.

But we can use whatever numbers you want. It's not rocket science.

 

[Up In Smoke]

I'm using the numbers the person I'm responding to used: $120k and a 5% CD.

But we can use whatever numbers you want. It's not rocket science.

Where did you pull 8% from? Where did $2400 per month come from?