Quote from: MrMurphy on April 15, 2013, 02:13:45 pm
In 188 months your mortgage would be 0 if you made extra payments of $1,500 per month or it would be $367,000 if you paid $0 extra.
And after 188 months you would be "saving" about $2000-$3000/month by not having a mortgage payment..plus the extra $1500/month extra you were paying.. Shouldn't that count for something???
No, because the math already takes this into account. If your portfolio was averaging greater than 3.5%, then your portfolio would be so big that you could liquidate a part of it, pay off the mortgage and have a sizable chunk left over. In an early chart I show the net benefit at various investment returns. At 8% you would be ahead by $151,000. If you can earn more than 3.5% then you are better off keeping the mortgage. If you can't earn 3.5%, then your safe withdrawal rate would be 1% or less based on age as you most likely will not be exceeding inflation.
I understand the psychological effect of paying down the mortgage, but mathematically it is a worse answer if you can hit 4% or more in your portfolio.
The government is giving away free money to jump start the economy. This is a once in the lifetime event. Those who pay it down faster are giving back the free money. If the choices are pay down the mortgage or blow your money, then obviously pay down the mortgage. If you are disciplined then invest in Vanguard and statistically you will be ahead.
Oh, Ok, i get it, because 188months is 15.5 yrs.. So, if you then invested the $3,500 for 14.5yrs after paying it off (total 30yrs) you'd still be ahead of investing $1500 for 30yr.. because that is the argument/misconception is that after it's paid off you'll have $xx extra to invest/catch up.
Is there a time frame, say if you could payit off in 2 yrs or 5yrs vs 15.5.. Would that make a diff?? Or does the interest rate make a diff?
I'm not trying to be an ass, i'm just trying to learn. I don't have a mortgage but big student loans.
Or you can see my situation here:
I'd love any advice!!
Take a look at this updated worksheet. I worked on Tomsang's sheet and found two primary concerns. I was seriously considering cutting back on mortgage pay down now that I'm under $100,000 balance but now I'm not so certain anymore. If I'm wrong, I'll probably shift more to Vanguard but I'm not seeing the risk reward.
1. Future Cash Flow is not calculated accurately for the accelerated Payoff club, not including the normal payment and extra payment once paid off.
2. The Investment rate is not applied to extra cash once the mortgage is paid off.
I added columns to the math and input sheet to show the differences. Notice the big swing in the compounding at the end of the cashflow. We went from lossing money paying off the house early of by 1.9Million and now we are making $550,000 by compounding the future cash flow.
D - C Compounding Future Cash Flow
with Mortgage Paid Off
Benefit (Loss) 7% Future Cash Flow 7038.56, year 6
Investing vs. Without Tax Gain Holdings
Mortgage Neg Loss with Payoff, Positive Gain Compounding Future Cash flow
$669.26 $(904.81) 12 Tax Difference
$20,829.02 $(27,784.76) 60 Tax Difference
$245,687.97 $(97,661.48) 120 Tax and Compounding
$550,993.38 $(160,632.72) 180 Tax and Compounding
$925,475.73 $52,826.56 240 Tax and Compounding
$1,391,028.37 $203,111.20 300 Tax and Compounding
$1,977,557.12 $505,474.90 360 Tax and Compounding