So after my last blog post I didn't feel like my argument was very strong and that I needed to back up my argument with some cold hard facts. So here they are!... Below you will find a comparison between the money (savings) that you will make by paying an extra $100 per month on a $150,000 30 year loan at 5% and the money that you would make by investing that same $100 in the stock market (specifically the Dow Jones) over 30 years.
Paying $100 Extra on Mortgage Investing $100/month in Stock Market
Mortgage
Interest $105,278 $139,884
Paid
Years when
Mortgage Paid 23.5 30
$ made in Stock $92,215 ($905 invested for $149,035
Market (Assuming 6.5 years after mortgage
8% annual return) is paid off)
Benefit compared Mortgage paid off 6.5 $56,820 more dollars
to other years earlier, save in stock market
$34,606 in mortgage
interest
I think it is obvious to see which scenario has a greater value. Many critics will try to use the recent stock market crash to argue that it is more important to pay off your mortgage first but the 8% figure on the Dow Jones includes the recent crash. So next time you think about paying a little extra to your mortgage, think about talking to a financial planner first. If they're smart, they will recommend you put that disposable income towards your retirement instead.
If you live in Logan or Cache Valley, Utah I would recommend Ted Karren at Edward Jones. He can be reached at 435-563-1811 and he would be happy to assist you with your investment needs.
About the Author
John Neil is a loan officer that is passionate about his profession. His goal with every transaction is to make a customer for life. The result is that 95% of his business comes from referrals of satisfied clients. If you need a cache valley mortgage, you can contact John at 435-770-2709. You can also follow him on twitter @LoganUTMortgage or facebook @facebook/MortgageNerd
John,
I will first concede that higher rates of interest will always beat lower rates of interest (which sound obvious, but those with 22% credit card balances don't see that obvious fact.) So your point still stands, just not as tall, even though I believe you have left out one critical detail-- that detail is that once the mortgage is paid off, the person would have a disposable income of not only the $100, but also the mortgage payment amount (since it is not being used to pay a mortgage anymore). As a result, they could invest that as well (thus making the comparison a true comparison of total outlay-- the comparison you present assumes that for the first scenario that once the mortgage is paid off the mortgage payment amount is no longer paid anywhere, while in the second scenario, the mortgage payment is still applied to the mortgage-- which isn't quite apples to apples). What I find is that after paying off the mortgage and then investing, a person would have an investing balance of about 96k, which leaves them still behind, but only behind by 54k. Adjusting that figure to today's dollars, assuming about 3.5% inflation, means they are behind by 19k, thus creating the question: Is 6.5 years of mortgage relief in the future worth 19k to you today?
I believe each person needs to evaluate this for themselves with numbers specific to their situation, since the numbers could vary significantly based on mortgage balance, risk tolerance, etc.
Austin-
Awesome! Thank for the feedback and for pointing out my error. I have made the correction. I agree that everbody's situation is going to be different. For some people it may just be a personal preference to pay the mortgage off early.
I like how you summed it up. Keeping your comments in mind, maybe a more meaningful blog post would be about whether the stock market can continue with 8% gains over the next 30 years. Then again, nobody can know for sure.
Thanks again for the comments.
I agree with both. But consider this. House is paid off - Great. But if you needed to access the $ from your home for any reason you are going to need to borrow against it and pay interest. But you can always sell you stocks and cash out at anytime.
Tom- Good point! It has always been easier to sell stocks than to do a cash-out refinance on your home.