Ask Terry Questions Paying down mortgage principal vs investing

Paying down mortgage principal vs investing

By Terry Savage on October 09, 2023 | Housing / Real Estate

Hi Terry,

I’ve heard your answer to this question before. I’m 69 years old. Let’s assume a mortgage rate of 3% (which I have). I’m currently making an additional $1000 per month payment toward principal. Doing this, effectively reduces my term from 30 years to 15 years. Every month, it saves me $500 in interest payment, I increase my equity, and will own my home in 15 years. Owning will result in creating, effectively, a payment stream for retirement of the principal amount I’d need to pay if I kept it at 30 years. I see that $1000 additional principal payment as an immediate 50% return on my payment due to the interest reduction. If I invest the $1000 at 5%, my return is $50. I’d need 10 years to equal the $500 and while I’d make $750 over 15 years, I’d have less equity in my house (but more liquidity) but still have 15 more years of mortgage payments. So isn’t it better to pay down my mortgage, even if rates are at 5% and my mortgage at 3% given the immediate return on the additional principal and owning my home 15 years sooner?

I hope I asked this correctly. I just can’t get my head around having to invest every month $1000, track those investments, take the risk I’ll get 5% guaranteed for 15 years so I can then pay the balance of my 30 year mortgage.

Terry Says

If it makes you feel better to pay down your mortgage, you have my blessing — as long as you don’t wipe out all the liquidity you might need for the unexpected costs — ie nursing home care, a new roof, or whatever comes along in the next few years.

From a mathematical point of view, it makes sense to keep the 3% mortgage. The lenders will be delighted to see you repay this loan. So I have a compromise. How about paying HALF the balance of your mortgage — as a principal repayment. Then keep paying the monthly amount scheduled, so it will be done in far fewer years. And you will have liquidity with the rest of your money!



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