{"id":1002,"date":"2016-03-17T12:45:46","date_gmt":"2016-03-17T17:45:46","guid":{"rendered":"http:\/\/www.investmentzen.com\/blog\/?p=1002"},"modified":"2020-01-23T02:39:12","modified_gmt":"2020-01-23T06:39:12","slug":"should-i-pay-off-my-mortgage-early-or-invest","status":"publish","type":"post","link":"https:\/\/www.investmentzen.com\/blog\/should-i-pay-off-my-mortgage-early-or-invest","title":{"rendered":"Should I Pay Off My Mortgage Early?"},"content":{"rendered":"

Should you pay off your mortgage early, or should you invest? It’s a great problem to have, but it’s also a major financial decision. Let me start by saying this:<\/p>\n

I<\/span> hate debt. Owing money feels terrible and dirty. I’ve been there.<\/strong><\/p>\n

Coming out of college, I had $60,000<\/strong> in loans and it was suffocating. I\u00a0can clearly remember the day that\u00a0I made the final payment, 15 years later. I still have\u00a0the letter\u00a0that from Sallie Mae congratulating me on paying off my loans. Good riddance.<\/p>\n

However, I willingly have mortgage debt. My\u00a0current home set me back $176,000<\/strong> and I had the money to pay cash. I briefly considered it, but instead took\u00a0out a mortgage. I kept the money\u00a0invested, mostly in an S&P 500 index fund<\/a>. Let’s take a look at how the experiment is coming along.<\/p>\n

Debt Rules! (sometimes)<\/h2>\n

Back in June of 2013, I took out a mortgage for $140,800<\/strong>. I put down 20%<\/strong> to avoid PMI. The terms were 15 <\/strong>years at 3.25%<\/strong>:<\/p>\n

\"loan

The juicy details of Mr. 1500’s mortgage<\/p><\/div>\n

I ran the numbers and as of 2\/1\/2016<\/strong>, almost 3 years into my loan, I’ve paid this in interest:<\/p>\n

$11,355,97<\/strong><\/h2>\n

Yikes. That is $11,355.97<\/strong> that I’ll never see again. This isn’t small change. It hurts a little. But wait, I have something much better to show you.<\/p>\n

Here is a chart showing how the markets have performed since I took on my debt:<\/p>\n

\"s&p500

Thanks IndexView<\/a> for the graph!<\/p><\/div>\n

Let’s apply this performance to the $140,800<\/strong> that I kept invested to see how I’ve done:<\/p>\n

140,800 * 1.24 = $174,592<\/strong><\/h2>\n

Did you see that number ladies and gentleman? My investment has grown\u00a0$33,792<\/strong>\u00a0($174,592 minus my original investment of $140,800).<\/p>\n

That $11,355.97<\/strong> isn’t so painful now, is it? I’m ahead – FAR ahead.<\/p>\n

Another way to consider\u00a0the numbers is to compare them with the total amount I’ll pay in interest:<\/p>\n

\"Chart

Chart from Amortization-Calc<\/a><\/p><\/div>\n

So, over the course of 15 years, I’ll pay $37,284<\/strong> in tax deductible interest. However, less than 3 years into my loan, I’m up $33,792<\/strong> on the invested money. I have a good chance of breaking even before the loan is 5 years old.<\/p>\n

But wait, it gets better<\/h3>\n

The recent performance of the stock market isn’t anything spectacular. I ran\u00a0IndexView<\/a>\u00a0all the way back to 1900 which shows an average return of 9.54%<\/strong>. The performance of the markets in the time period that I’ve had my loan (7.98%<\/strong>) is below average:<\/p>\n

\"s&p500

All the way back to 1900<\/p><\/div>\n

Even with the recent subpar performance of the markets, I’ve made almost 3 times<\/strong> more money from the index fund than I’ve paid in interest.<\/p>\n

But wait, it gets even<\/em> better<\/h2>\n

As great as my numbers look now, they will probably look considerably\u00a0better down the road for two reasons:<\/p>\n

1. Mortgage interest decreases over time<\/h3>\n

The earlier you are in a\u00a0loan, the more you’re paying in interest. This is how all loans work. The first full year of my mortgage, I paid over $4,000<\/strong> in interest:
\n\"Screen-Shot-2016-03-06-at-10.01.20-AM\"<\/p>\n

Contrast that with the last full year of the mortgage when I’ll pay less than $500<\/strong>:<\/p>\n

\"Screen<\/p>\n

If I’m this far ahead\u00a0in the early stages of the experiment, imagine how I’ll do at\u00a0the end.<\/p>\n

2. Compound interest is working for you<\/h3>\n

Your invested money works in the opposite way of the mortgage interest. Dollars reproduce like rabbits. Over time, those little guys will\u00a0multiply like mad.<\/p>\n

In the next\u00a0calculation, I used\u00a0a very modest return of 6%<\/strong>. Despite that conservative number, the results are incredible:<\/p>\n

\"Screen

Chart from Dave Ramsey<\/a><\/p><\/div>\n

Should I pay off my mortgage?<\/h2>\n

So should I pay off my mortgage? The numbers say no, I definitely should not pay off my mortgage.<\/p>\n

Let’s review the numbers:<\/p>\n