Here's why paying off your mortgage might be better than investing.
I've heard both arguments. Pay off your mortgage and invest the money because the return is higher and the mortgage is a low interest loan.
Let's talk real numbers. I owe 150k on my mortgage. At least that's what the bank says. But if I look at the amortization schedule I actually owe 150k principal and 75k in interest.
If I pay off my mortgage early I save myself 75k in interest. What if I instead invest the money over the remaining time on the loan. So I went to investor.gov and used their compound interest calculator. I set the initial investment at 150k, no monthly contribution because I'm still paying my mortgage, length to 23 years (that's how long I have left) estimated interest to %12 with a %12 varience because average returns are estimated at %12 and highs have gone higher and lows have been lower. So this shows that at the end of 23 years if I invested my money instead of paying off my mortgage I could have in the best case 5.8 mil, in the average case 900k and in the below average case my initial investment of 150k. Next I said what if I invested 1k but then contribute my monthly payment since I paid off the loan. Everything else stayed the same. Now in the best case I have 2.8 mil, average case 800k and worst case 24k.
So in the average case I'm only 100k better off investing instead of paying off my mortgage. But there are some benefits associated with paying off the mortgage that there aren't when investing instead
- peace of mind
- you control your money from now on, no bank is forcing you to make a payment
- you can change careers because your living expenses are drastically reduced.
- easier to take on another mortgage for an investment property
I'm interested to hear counter opinions. Why is investing better than paying off a mortgage? What did I get wrong in my scenario here?