# The Money Mustache Community

## Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: MoonLiteNite on March 16, 2017, 05:10:28 AM

Title: Paying off house vs investing (check my math?)
Post by: MoonLiteNite on March 16, 2017, 05:10:28 AM
So i am pretty sure i am going to take the loss and pay down the house first. But just was wondering about my math....

Basically my house loan is a personal one, I rather pay my father \$\$\$ than a bank. He is fine with min payments, or me paying off early. I just would like to know how much am am i losing by paying him off early.
You can view the current Payment plan here.

Rate = 3.737
Min payment = 1,000
Potential payments = 2,500
Total remaining 54k~

Time for my shady unknown math problem....
So at this current point in time, if i were to pay 2,500\$/mo i would save around 3,000\$ on interest. The loan would go from 5years to 2 years.

Now say instead, i take that extra 1,500\$ and invest it at 3.25% (difference of 7%, my % gained - % paid) over 5 years, it comes out to be 99,902.74\$. Or 9,902.74\$ in gains.

So 9,900\$ - 3,000\$ = 6,900\$ ....That means i am basically throwing away 6,900\$ if i pay off loan early rather than investing.
Or is my math so far off i should be ashamed?
Title: Re: Paying off house vs investing (check my math?)
Post by: SwordGuy on March 16, 2017, 05:23:24 AM
You should be using 10%, not 7%.  10% includes inflation.   Your mortgage payment won't increase but your payment will be made with cheaper dollars.
Title: Re: Paying off house vs investing (check my math?)
Post by: MoonLiteNite on March 16, 2017, 05:27:08 AM
So i will be losing more like 7200\$ or so if i pay off early? using a 10% yearly gains.

Title: Re: Paying off house vs investing (check my math?)
Post by: valuenation on March 16, 2017, 09:32:03 AM
Having the same situation on one of my rental properties.  The rate is ridiculously low (app. 2%) due to the plan I was put on back in the day of cra cra mortgage financing.  Rather than pay the whole rental amount toward buying down the loan, which I've done for the past 5 years, I am going to start moving that extra \$750 to index funds and pay off the bulk at once in 10 years.
Title: Re: Paying off house vs investing (check my math?)
Post by: frugaliknowit on March 16, 2017, 11:54:14 AM
Your comparisons are not valid.  Paying off the loan is risk free.

Your theoretical 10% investing is not.  Not that I time the market, but given that we are 8 years into a bull market, the odds of your having an unfavorable outcome with time horizon of your risk investing ("10%") is quite high.

1.  3.37% guaranteed.
2.  Stock market return over the same period, which could be -50% to maybe +30%.
Title: Re: Paying off house vs investing (check my math?)
Post by: dandarc on March 16, 2017, 12:02:46 PM
2.  Stock market return over the same period, which could be -50% to maybe +30%.
https://www.thebalance.com/rolling-index-returns-1973-mid-2009-4061795

I'd say it is more like the range is somewhere between -25% and +40% for a 2-year timeframe.
Title: Re: Paying off house vs investing (check my math?)
Post by: moonpalace on March 16, 2017, 12:50:42 PM
You may be able to invest pre-tax dollars, while you pre-pay a mortgage with after-tax dollars, and the tax benefit might dwarf the other differences.

My wife and I had the choice of paying down our mortgage (2.75%) or saving her self-employment income (taxed at ~40%). So if we pre-paid the mortgage we'd get a guaranteed return, but only on 60% of the money. We chose to take 100% of the money, invest it, and pay (10%? 15%?) taxes way down the road.