Inspired by a post from yesterday, I made a spreadsheet to analyze the value of paying off your mortgage early versus putting the extra cash in an index fund.
Assumptions:
- Initial mortgage balance: $300,000
- Mortgage rate: 2.7%
- Extra monthly cash available: $250
- Rate of return on investment (nominal): 7%
- (Monthly P&I payment based on first two: $1,216.79)
I ran three scenarios:
- Make the monthly payment on your mortgage plus an extra $250/month towards principle. This pays off the mortgage after 23 years, at which point you contribute your monthly P&I in addition to the $250 (for a total of $1,466.79) to an investment account.
- Make the monthly payment on your mortgage, but put the extra $250 into an investment account.
- Make the monthly payment on your mortgage, put the extra $250 into an investment account, and at year 23 pay off the balance on your mortgage from your investments, at which time you can continue as in (1) above, now contributing $1,466.79/month.
Conclusions:At the end of year 30, your mortgage is fully paid off in all three cases, but your investment account balance is $162,430 in scenario 1, $304,992 in scenario 2, and $284,205 in scenario 3. The clear winner mathematically is obviously to borrow as much as you can at 2.7% and invest at 7%, but even if you value the free cash flow once your mortgage is paid off (let's say you bought a house at age 45 and want to be mortgage-free at retirement in your 60s), it's still vastly more profitable to invest your extra cash instead of paying down principle, then just pay off the balance when you retire.
I linked the graph above, and if anyone can figure out how to share a Google Sheet without having my real name plastered across the top, I'll do it. Otherwise I can plug in a few scenarios on request.
Note: Don't get thrown off by the slopes of the graphs. Scenarios 1 and 3 have steeper slopes at the end because you are contributing more money each month at that point. If the lines kept going, you'd see scenario 2 get steeper than the other two at that time and continue to pull further away.
Submitted August 28, 2021 at 01:58PM by poe_todd https://ift.tt/3sVyKpw
