The exact price of paying off the mortgage early 2

Last week’s post on debtfreedivas.org about paying off the mortgage early, again made me second guess my decision on investing as opposed to paying off my mortgage. I did okay investing but, would I have slept better not having a mortgage today, had I paid it off early?

So to find out if I did the right thing, I’ve created my own Prepay vs Invest calculator and ran a couple of “what-if” scenarios.

Take the fictional Millennials Jane and Joe. Retirement will start for them at 2050 so for the sake of this simulation lets say 35 years from now. Jane and Joe are getting a mortgage of $250,000.00 at 4.25% and plan on diligently paying an extra $500.00 starting month one.

Lets look at that scenario. They come to my Online Prepay Mortgage vs. Invest Calculator and enter a 30 year $250,000 mortgage starting 1/1/2016 at 4.25% with $500 extra payments. After the mortgage is paid off, both the extra payment as well as the mortgage payment (Principal and interest) are sent to the stock market. prior to mortgage payoff they will not invest.

The result from this simulation is as follows:

Prepaying the mortgage and subsequently redirecting all payments to investments results in:

Mortgage paid off: October 1st 2032
Interest paid: $100,884.03
Investments at retirement: $865,566.48

Investing first and paying the mortgage as directed by the bank (and subsequently redirecting mortgage payment  to investments) results in:

Mortgage paid off: November 1st 2045
Interest paid: $192,745.90
Investments at retirement: $1,251,125.92

Prepaying the mortgage, Jane and Joe pay over $91,000 less in interest (who doesn’t want to stick it to the bank) and yes they do sleep easier 13 years earlier knowing they truly own their home but… They do walk away from over a $385,000 in the form of a nest egg when they retire. In this scenario it truly seems that investing first and paying the mortgage as directed results in a lot more money.

Exact difference $1,251,125.92- $865,566.48-($192,745.90-$100,884.03) = $293,697.57

This is all assuming a return on investments of 8% which according to some may be way too aggressive. If Jane and Joe were to invest in something less risky like Bonds which tend to return 5% to 6% the simulation starts looking different. If we took the same scenario but assumed a more conservative 6% return on investments

we get the following numbers:

Mortgage prepayment results in:

Mortgage paid off: Aug 25 2032
Interest paid: $100,884.03
Investments at retirement: $693,989.07

investments over mortgage prepayment:

Mortgage paid off: Sep 25 2045
Interest paid: $192,745.90
Investments at retirement: $807,179.19

of course the mortgage dates and interest remain the same as we haven’t changed anything there. Looking at the investment results something interesting has just happened. Yes,  $807,179.19 is more than the $693,989.07. Take that difference minus the interest payed less on the mortgage ( $192,745.90 -$100,884.03)= $91,861.87

Exact difference $807,179.19– $693,989.07 – ($192,745.90-$100,884.03) = $16,900.84

Now lets take into consideration they paid $91,861.87 less in interest and paid they off their house 13 years earlier. That, combined with the fact that prepaying the mortgage comes with less uncertainty (no guarantees in investing),  $21,328.25 doesn’t seem like such a high price to pay.

$21,328.25  is still a lot of money but in the scheme of a retirement fund of hundreds of thousands (not looking at any 401(k) that may have been made over the same time

Conclusion

If you are a true believer, the market goes up over time, financially it makes sense to invest over paying off your mortgage. Depending on how much you think the market may go up that can vary greatly. One might even argue that, with an expected return of 6% (or less) you are better off paying off your mortgage.

One major fact that you cannot overlook is that THERE ARE NO GUARANTEES in investing. If you had invested over prepaying your mortgage you may have a million the day you retire. Should the market crash the day before you retire you may be looking at less than half that.

If you paid off your mortgage, no matter what the market does the deed will still be in your pocket.

Want to see for yourself? Check out the  Online Prepay Mortgage vs. Invest Calculator. It will take your information and present you with the results in real-time (no requests for email addresses). Along with the results you see above you can hover over the two graphs it creates and see annual snapshots.

if you want to get to the real details you can even explore the monthly numbers by checking the “show” check box for each of the 4 tables.

Update: I initially used my retirement calculator to figure out the numbers. I’ve since created a dedicated calculator and rewrote the article accordingly.

Good luck reaching your financial goals