I am going through a refinance right now for first and second on our house. I just ran some numbers and I'd like someone to "check my math". I can send an extra $1250 to mortgage each year (payments of $625 in Nov and Dec) or can invest the same in a taxable account the same two months.
(2nd) Mortgage:
55k, 7.410% apr. 30 yr fixed payment of $382.
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Invest (do not pay off early):
Mortgage payment of $382 for 30 years.
Costs $82,348 in interest payments over 30 years
Costs $1250*28 (first 2 years do not invest the money)= $35,000
"result" is $154,000 in investments after 30 years (plus paid off 2nd mortgage). Assuming 9% rate of return.
Pay down (do not invest until 2nd is paid off):
$625 payment in Nov and Dec each year (except first two years).
Costs $41,208 in interest
Costs $1250*16 yrs of paying down=$20,000
(2nd mortgage paid off in 16 years according to my calculations).
If I invest 12*381+$1250 each year from 16-30 ($5834/year) with same 9% rate of return
"result" is $187,000.
Am I missing something? I was expecting to see the "late investment" not exceed the "invest early".
When I went through same numbers for first, it made sense to invest (much lower APR), but with second I am seeing a different trend.
Pay Down or invest?
March 30th, 2007 at 08:09 am
March 30th, 2007 at 08:59 pm
March 31st, 2007 at 05:19 am
April 2nd, 2007 at 07:32 am
I get a better return paying off second, then investing the payment for the second into equities for years 16-30. At end of year 30, I would have a paid off mortgage (adds 365k to net worth), plus investments with around 185k in them.
If I paid off 2nd, then rolled that money to paying off 1st, I would be debt free in 26 years (net worth of 365k). The last 4 years investing the money (from 1st+2nd) is 140k. I don't see the return paying off the 1st 4 years early. That 186k is enough to handle 4-6 years of early retirement without tapping IRAs early.
March 10th, 2008 at 11:57 am
I think there are a couple of mistakes in there. First off is the loan will take 18 years to pay off early (2 years with normal payments and 16 with 1250 additional payments). I got this by getting the normal amortization schedule and then plugging in the value after 2 years as the starting value into a "how advantageous are extra payments" calculator.
Anyway, this change makes the "pay down" case worse, with a final investment value of about $125K.
So here is the way I see it:
Invest case:
Cost: 82K in interest
Cost: 35K in investments
Investment value after 30 years: 154K
Net gain is 37K
Pay down case:
Cost: 41K in interest
Cost: 71K in investments
Investment value after 30 years: 125K
Net gain is 13K
So the invest case does come out better.
March 10th, 2008 at 12:29 pm
What return was used for investment value (in both cases)?
What is "cost" of investments?
Keep in mind loan is now close to 2 years old, so I am 2 years into this loan before extra payments were made.
I have since done some calculators and it will make more sense to pay down second mortgage- if I can pay it down aggressively (make $1000 payments on a $300 mortgage payment).
Goals as it pertains to this subject:
3 months expenses in cash
3 months expenses in moderate investments
pay down second mortgage
increase value of moderate investments
I have 3 months cash already
now working on getting 3 months in moderate investments
paying down second will start when my truck is paid off in 2010 (Aug of 2010). 2nd will be paid off close to 7 years later (just in time to get another truck).
moderate investment goal is to get mortgage payoff balance in savings prior to retirement.
March 10th, 2008 at 01:20 pm
I think we can agree that mathematically it is always better over the long haul to invest than pay off debt if you can guarantee a higher return on the investment than the interest cost on the debt. In the extreme, if you had 55K up front and had the choice to pay off the 7.4% loan in full or invest at 9% return, paying debt payments out of the investment, it would make sense to delay paying off as long as possible (ignoring transaction costs).
March 10th, 2008 at 02:38 pm
Other numbers make sense, it was the phrasing "investment cost" which threw me.
March 11th, 2008 at 03:17 am
If you are going to throw taxes in there, to be fair, you should include the writeoff for the 2nd mortgage interest as well.