Stick It Out!

Mortgages & Long-Term Investing:
*Sexy Alert: you will always save money on interest payments over the course of a 15 year mortgage versus a 30 year mortgage. Now, let’s look at the options of investing and paying down your mortgage!

Do you prefer paying off your mortgage early, focusing on investing, or both? Financial math shows that the younger you are, the more growth opportunity you have when investing. With a low interest (4%) mortgage loan and a 30 year old person as the example, the outcome reflects a 30 year mortgage as the more beneficial plan because of your time horizon, but it does come with an increased level of risk (investments are not guaranteed).

Assumptions:

  • You’re 30 years old with a 30 year investment timeline
    • Mortgage loan is $300,000 with 3.5% – 4% interest rate
    • Retirement investments achieve 6% rate of return annually; 2% inflation annually

Options (approximate numbers, rounded):

  1. 30 Year Loan:
  • Monthly income flexibility: $786.81/month difference
    • $786.81/month invested for 30 years, assuming 6% growth: $745,000
      • In today’s dollars: $415,000
    • $216,000 total interest paid ($7,200 per year): $175,000 in today’s dollars

Overall Opportunity: $415k – $175k = $240,000

  1. 15 Year Loan:
  • Monthly income flexibility at 15 year mark: $1,432.25
    • Invested for 15 years, assuming 6% growth: $400,000
      • In today’s dollars: $300,000
    • $100,000 total interest paid ($6,600 per year): $85,000 in today’s dollars
      • $75,000-$80,000 if you assume the 15 year interest rate is 3.5%

Overall Opportunity: $300k – $85k = $215,000

Great news is that both options are relatively similar from a mathematical perspective – but ONLY if you’re investing ALL of the mortgage payment upon completion of the 15 year payoff. If you’re young with a 30+ year investment horizon and you can afford the 15 year mortgage payment, your best bet is to go with a 30 year mortgage and invest the difference.

Each of these options have vastly different behaviors so it’s important to know who you are! 30 year mortgages afford you cash flow flexibility, but if you are not in control of your spending (AKA you try to keep up with the Joneses) then you may be better off with a 15 year mortgage because it requires you to pay yourself first.

Always consider your cash flow, life plans, future goals, and your time horizon! My favorite part is the time horizon…how does growing your $745,000 investment into $1.5M sound?

Leave a Reply

Your email address will not be published. Required fields are marked *

three × three =

55 + = 61