Should You Pay Off Your House Early?
The Controversy
There are a lot of planners out there who disagree on whether or whether not you should pay off your mortgage early. Many a world war, fought with bloodshed and tears, have taken place over this issue. Me personally, I’m a numbers person. You see, figures don’t lie. And even though liars DO know how to use figures, I will be very honest in my approach in presenting numbers, to prove beyond a shadow of a doubt, whether it is good or bad to pay off your house prematurely.
The Stats
Let’s look at the numbers. I will give you two different situations involving the same fictitious people. Lets say that Kevin and Shandra have just borrowed, oops…. I mean bought a house. They took out a loan for $100,000 at 8% interest and the payment is $734/mo. After they pay their note, they have an extra $300 left. Should they invest it for retirement, or should they put the extra money on the mortgage and THEN invest the rest for retirement after the house is paid off?
Now, historically up to this point, mutual funds have averaged approximately 12%. This includes all of the crashes. Now, notice I said AVERAGE. This includes all of the jacked up funds that lasted three weeks and finished in the negative. Now if you would do some research on mutual funds, you could get at least that much if not more. So I will use 12% in the illustration and I will explain more in depth after the illustration. For these illustrations I will use a period of 30 years.
Scenario #1
As I said, this loan is for $100,000 at 8% interest and the payment is $734/month. Now Shandra and Kevin decide to pay that extra $300/month on the mortgage so the total payment will be $1034/mo. If they make this payment every month, they will be out of their mortgage in 13 years! Wow! So, Kevin and Shandra then decide to invest that total payment of $1034/mo in a 12% investment for the remaining 17 years (the amount of time it would have taken them to pay off their house). After 30 years Kevin and Shandra will have $683,792.21.
30 years = $683,792.21.
Scenario #2
Kevin and Shandra, instead of paying the extra amount on the mortgage, decide to invest that $300 in a 12% investment, so they pay the minimum payment of $734 for the entire 30 years. If Kevin and Shandra invest $300/mo in a 12% investment, they will accumulate $95,718.47 after 12 years! After 12 years, the balance on their home will be $83,630.47. If they keep on investing the $300/mo, they will have $1,048,489.24 after 30 years!
30 years = $1,048,489.24.
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Posted by Carlos Sagastume on November 14, 2009. Filed under HUD Homes.
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