Tweet
A lot of people here talk about the strides they are making toward paying off their mortgage early. In a lot of cases you will actually come out ahead by investing that money regularly in a mutual fund instead.
Here is a calculator I found that will do a comparison for you (it takes the interest tax deduction into account.):
In my case, if I choose a very conservative 7% return on my mutual fund, and look at either paying an extra $200 on my mortgage every month or investing that $200, my loan will take 4 years longer, but my fund will be worth about $123k -- $20.7k more than the interest saved.
(One assumption this calculator makes that I disagree with is that I will make an extra investment each year equal to the taxes I saved due to having a higher interest deduction. I think this is unlikely. In my case these investments add up to $13.3k.)
If I assume a return of 10% (which according to Common Sense on Mutual Funds is an index fund's long-term historical return), my fund will be worth $160k, $59k more than the interest saved.
I have almost enough in liquid assets to pay off my mortgage, but I won't be doing it. I believe in the long run I will come out far ahead by keeping that money invested. (Another calculator from the same site, http://www.hughchou.org/calc/payoff_v_borrow.cgi, says I will -- to the tune of $292k at 7% return, or $833k at 10%!)
Another advantage of investing vs prepaying is that a mutual fund is liquid enough to act as a backup emergency fund, whereas once you've made a prepayment you need a home equity loan to tap those funds.
Here is a calculator I found that will do a comparison for you (it takes the interest tax deduction into account.):
In my case, if I choose a very conservative 7% return on my mutual fund, and look at either paying an extra $200 on my mortgage every month or investing that $200, my loan will take 4 years longer, but my fund will be worth about $123k -- $20.7k more than the interest saved.
(One assumption this calculator makes that I disagree with is that I will make an extra investment each year equal to the taxes I saved due to having a higher interest deduction. I think this is unlikely. In my case these investments add up to $13.3k.)
If I assume a return of 10% (which according to Common Sense on Mutual Funds is an index fund's long-term historical return), my fund will be worth $160k, $59k more than the interest saved.
I have almost enough in liquid assets to pay off my mortgage, but I won't be doing it. I believe in the long run I will come out far ahead by keeping that money invested. (Another calculator from the same site, http://www.hughchou.org/calc/payoff_v_borrow.cgi, says I will -- to the tune of $292k at 7% return, or $833k at 10%!)
Another advantage of investing vs prepaying is that a mutual fund is liquid enough to act as a backup emergency fund, whereas once you've made a prepayment you need a home equity loan to tap those funds.
Comment