There is a ray of hope in a Personal Finance blogosphere that currently seems to be ruled by Ramsey Clones: Moolanomey says that you should NOT pay off your mortgage early:
I can now say for certain that I fully oppose the idea of paying off your mortgage early because there are several related factors that make this a bad idea.
[AJC: I’ll leave you to read Pinyo’s excellent post to discover the ‘several related factors’ for yourself]
Look, if Pinyo’s post – or, my earlier posts – haven’t yet convinced you, let me draw it out for you:
We have two people, each sitting on a $150,000 house with a $100,000 mortgage remaining; they both have just signed up for a 25 year fixed rate mortgage … their payments are currently $585 at 5%. They both decide that they can afford to ‘invest’ an extra $100 a month.
This person puts the extra $100 a month into their mortgage, shaving off 6 years on the total time to pay back the loan, saving $20,000 in interest in the process.
Being a smart investor, and once the loan is fully paid off, this person then starts to put both the mortgage payments AND the extra $100 a month into an Index Fund and waits 25 years to cash out (hopefully, allowing enough time to get as close as possible to the 30 year 8% stock market return ‘guarantee’ that he’s heard so much about).
This person lets the mortgage ‘ride’ and instead invests the $100 ‘extra money’ a month straight into a low-cost Index Fund returning an average 8% over a 30 year period, adding the mortgage payment at the end of the 25 year period when the mortgage is paid off, then waiting the additional 19 years so that he finally cashes in his financial ‘chips’ on the same day as Person A.
At the end of (19 + 25) years or (25 + 19) years – depending upon which person you are 🙂 – you have an identical and fully-paid off house (so, the value of that is irrelevant in this comparison) and an Index Fund.
Let’s see how you fared with that Index Fund …
Now, we’re looking at a very simplified example, where the homes only cost $150,000 to begin with, and we’re only adding $100 a month … yet the difference between the two graphs represents a total additional return to Person B of nearly $100k by NOT putting the additional money into their mortgage.
In the ‘real world’ he would be even better off by:
1. Increasing his additional monthly investment in his Index Fund to at least match inflation,
2. Expecting better than the worst-case 30 year stock market returns that I have provided for here,
3. Reinvesting the ‘tax advantages’ of the larger remaining home mortgage.
Which camp do you sit in?