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Investing vs. Paying the Mortage Early

·2 mins
Finance Investing

One of the factors that will determine if investing is a better option than paying your mortgage early is the interest rate for your mortgage.

For example, let’s say you have $200,000 in the bank. Without money. You could buy a house cash or you could do a down payment of $40,000 and invest the rest in the S&P 500. Historically, the S&P 500 has had a return rate of 9.6%, whereas if you where to pay your house in full, your house would appreciate at a rate of about 4% annually, and if your mortgage interest rate is high like 8% you would not make a lot of money.

Here the calculation to make is very simple. Calculate how much money you will make by investing $160,000 in the S&P 500 for 15 or 30 years versus how much money you will pay in interest if you decide to pay your house over the span of 15 or 30 years. That the most profitable length of time to pay your mortgage may not be 15 or 30 years; it could depend on the mortgage formula.

Investing $160,000 for 15 or 30 years vs Paying early #

Assuming an average return of 9% in the S&P 500, investing $160,000 for 15 years, compounded yearly, would return $582,797.19.

However, we must subtract the total interest of having a 15 year loan for $160,000 at 6%, which is $83,030.77. This means the profit over 15 years would be $582,797.19 - $83,030.77 = $499,766.42.

In 30 years that would be $2,122,828.56.

However, we must subtract the total interest of having a 30 year loan for $160,000 at 6%, which is $185,341.10. This means the profit over 30 years would be $2,122,828.56 - $185,341.10 = $1,937,487.46.

If you pay your $200,000 house upfront and invest $889 every month into the S&P for 15 years (amounting to $160,020) with an average return of 9% compounded annually, you would make $313,222.25.

In 30 years that would be $1,454,128.82 even if you continued to invest $889 every month.

Conclusion #

Do not buy your house in full. Invest your money and get a loan instead. Your returns will be higher than the losses incurred due to the loan interests.