You haven't told us what his tax bracket is. It is possible that he is better off continuing to pay the mortgage. If the mortgage has a very low rate but he is in the top tax bracket, then he may indeed be better off with the mortgage.

Many Fortune 500 companies will borrow money at low rates rather than spend cash on hand. Why? Because it is tax deductible as a business expense.

If you want to get into the weeds you can also calculate the cost of capital today compared with 10-15 years from now. And lets not forget that the dollars he borrows today will not have the same value as the dollars he is repaying with, 10 years from now. Due to inflation, those repayment dollars 10 years from now will be worth less than the ones he borrows today.

IF.........he is looking for advice, he needs to have a CPA run all the numbers for him. That would be money well spent rather than just assuming it's better to pay off the mortgage.

There might be several reasons, but none of them are good. Not everyone has the means to pay off early, I understand that. But if they do, there is not a single good reason not not to pay it off. You need to factor in the risk of not paying off early also. Nobody can predict having health issues or accidents that might keep you from keeping up with payments. No worries about that if its paid off.

Here is a hypothetical mortgage loan:

200,000.00 Loan
4% interest rate
30 year term
no insurance or taxes figured in

Monthly payment - 954.83
Total paid back - 954.83 X 360 payments = 343,739.38 200.000.00 principal and 143,739.38 Interest.

You pay back way more than 4% of 200,000.00 which is only 8,000

Your savings or stock investment return would have to be extremely high to come out ahead of the compound interest you are paying out.

Because IF he pays off the mortgage he may not have any capital left to invest. Opportunity cost is the term in this instance. He has the opportunity to make 10% in the market or save 4% by paying off the mortgage. The 6% difference is the opportunity he has sacrificed by paying off early.

Appreciate all the different opinions..thanks

no doubt,i gotta get workin but its a great read.

I understand your point White, but what is the cost of risk? 100% of foreclosed homes had a mortgage.

The problem with this thinking is that he is actually paying a lot more than 4% because it is compounded.

And, once it is paid off, he would have 100% of what used to be the mortgage payment to invest.

This is essentially debtors prison. You need 20% down and no more than 15 years.

However, in this case it would probably make sense to pay as much as you can.

Risk is something we live with in different forms every minute. Insurance is the only way to hedge some of that away. One thing for sure is that everyone with a mortgage should know about PMI. Private Mortgage Insurance. Look at the terms of your mortgage.Most will include a monthly fee for PMI. You can get rid of this cost once you have paid down a given % of your principal. The other way to avoid it is to put 20% down when you buy the house. Many people are unaware of this, but could save a bunch just by checking onto it.

The risk of default is different than getting hit by a truck. I understand where you're coming from though. The only way to avoid the risk you're talking about is to never be in that position. But owning your own home is generally the best investment most people can make....over time.

Not really. Bankers use what is called the rule of 72...just as a rule of thumb when considering an investment.

If you have $200,000.00 and invest it for 30 years...as in your example.... you need only earn a nominal rate of return of 2.4% compounded annually, to more than double that initial 200K...to $407,407.20

So the rule of 72 says.....72 divided by 30 years, equals 2.4 % needed to double your investment

It's been quite a few years since I had a mortgage, so this may not be as today.......

My mortgage payment was heavy on interest at the beginning and towards the end, it was almost all principle. My statement had right on it this much of payment is interest and this much on principle. At the beginning like I said, it was heavily interest so I didn't see the up-side of paying it off once most of my payment was principle towards the end.

It's still that way Hippie. The bank gets its VIG up front. Usually you won't see much decline in principal for about 5 years.

The difference is in interest is simple versus compounded. The 4% and 6% discussion is on a short term simple basis. You can not compare that to a 30 year compounded 2.4%. It is not comparing apples to apples. Most folks can not see past next month much less next year and certainly not the next 30 years. Especially from an investment perspective.

Gotcha White.

Banker lady, neighbor who knew our family when we were still crapping our pants told me, if your gonna pay extra on principle, do it early, nog at the end.
Of course, until I had the means yo pay more, I saw on my statements why she advised that.lol

No. Both your example on the mortgage costs and mine on the investment results use compound interest.

The difference in the total is because in your example of the mortgage, the interest is calculated on a declining balance every period.

In my example the interest earned is on an increasing balance every period.


I agree that most folks don't consider the long term

Not sure about the tax bit sounds a little goofy. I have a great rate on mine and there’s no way I’m paying it off early when I can use my money somewhere else making more money. Might be wrong but that’s how I do things. Also I make them set all my loans up where the principal is paid up front instead of decreasing interest for the duration of the loan. Makes your payments higher in the beginning but saves a significant amount of interest money paid compared to a regular house or land loan. Some banks won’t do it and most have never heard of it.

Exactly ! And if you are going to make extra payments be sure your bank knows they are applied to PRINCIPAL ONLY. Otherwise they will take a bite of interest too.............assuming you are just making your next payment early.

Yes, you specified what you wanted extra to go against.

She would give me what she called "on demand" loans for lesser amounts when I needed. They were simple X amount of interest against the outstanding principle.
They'd send you a slip with interest owed which had to be paid, and you could pay all, no or anything in between on principle. Next month, you'd pay X interest on new principle amount, etc.I guess they could call the whole note whenever they wanted, the reason she called it on demand.

Maybe it's just me... But peace of mind is the single greatest incentive to be debt free. I hate being beholden to someone, especially where money is concerned.

I would like to see property taxes abolished for the same reason. My property taxes are dirt cheap here... I pay a day and a half's wages a year. But if I didn't pay for a few years the county could steal my house over basically a week's wages... And I sure don't get much for what I pay, even if it's only a day's wages.

I didn't buy my property to rent it from the @&#$ county over my lifetime.

Mike