Paying off your mortgage sounds like a great idea – but is it really? Let’s see what the math says. I’ll just be talking about the principal and interest portion of a mortgage payment here – since you will owe for property taxes and homeowner’s insurance for as long as you own the home, whether you have a mortgage or not.
Say you have a 30-year mortgage of $500,000 with a fixed rate of 5.125% – today’s (08/16/2022) rate.
- Your monthly principal and interest payment would be $2722.42.
- You would make 360 payments to pay off the $500,000 mortgage.
- You’d pay $480,076.55 in interest over the 360 monthly payments.
What if you paid an extra $250 per month on your mortgage, every month? $2722.42 + $250 is a total monthly payment of $2972.43.
With a $2972.43 payment you would pay your mortgage with 298 payments vs. 360. As a result, you’d only pay $383,898.74 in interest – a savings of $96,177.81 in interest. You would shorten your loan term by 62 months – sounds great, doesn’t it?
But – what if instead – you simply made the regular payment of $2722.42 and then invested the $250 per month, every month, for 298 months.
The average stock market return is about 10% per year for nearly the last century. Many financial advisors will use a lower estimated rate of return to be conservative. So let’s look at the result of investing $250 per month for 298 months, at a several different average rates of return:
| Average Rate of Return | Account Balance After 298 months |
| 10% | $325,754.40 |
| 9% | $275,628.67 |
| 8% | $234,122.88 |
| 7% | $199,680.07 |
| 6% | $171,032.64 |
After making 298 regular payments on your mortgage, you would still owe $149,016.36 – and you could pay this off with your investment account and still have funds left over:
| Return | After 298 months | Pay Mortgage Balance | Remaining Funds |
| 10% | $325,754.40 | $149,016.36 | $176,738.04 |
| 9% | $275,628.67 | $149,016.36 | $126,612.31 |
| 8% | $234,122.88 | $149,016.36 | $85,106.52 |
| 7% | $199,680.07 | $149,016.36 | $50,663.71 |
| 6% | $171,032.64 | $149,016.36 | $22,016.28 |
I am not a financial advisor, and so I can only advise you about your mortgage. But personally, I prefer to invest regularly and NOT pay extra on my mortgage, for a number of reasons. This takes diligence to invest every month, and your actual rate of return is not set in stone, so there is risk with this approach that you have to be ok with.
But unless your retirement savings are fully funded and you don’t need to save any more, I believe there is a greater benefit investing funds and letting them grow vs. paying off your mortgage early. There is certainly the uncertainty/risk of the rate of return not being a sure thing. But those invested funds will be easily accessible simply by selling the funds they are invested in.
If I paid off my mortgage and needed to access the equity in my home, I’d have to refinance. And a refinance will have closing costs, take time, be subject to the market interest rate at the time, and require that I qualify for the mortgage.
It comes down to what is most important to you, and what you are most comfortable with. Any plan is a bad plan if you can’t sleep at night worrying about it. Depending on your overall finances and your personal circumstances and comfort level, paying off your mortgage early could be right for you. But maybe not. So my advice is always to talk with your financial advisor before paying your mortgage off early. Let me know if you don’t have one and need a referral.
Note – these calculations don’t take into account and tax benefit you may get from writing off the mortgage interest, or tax expense you would have for gains in the investment account.