Stop Paying Off Your Mortgage Quicker

Let’s be honest for a minute, nobody wants to have a mortgage. First-time home buyers typically come to me wanting to pay off their mortgage within 15 to 20 years. Now, what if I told you that by paying down your mortgage quicker, you’re actually losing money, and not by a little. You’ll want to consider your current mortgage rate, however, in most cases, stop trying to pay off your mortgage quicker.

Despite the well-known financial guru Dave Ramsey telling you ways to pay your mortgage early, I’m going to share the opposite opinion. For this, let’s consider you’re purchasing a home for $625,000.00 with a 20% down payment and at a 2.5% fixed 5-year interest rate. For this example, let’s take Sally and Joe. Sally decided to have an amortization period of 30 years, while Joe decided to pay off his mortgage quicker and go with a 15 year amortization period, both having a $500,000.00 mortgage.

Sally’s monthly mortgage payments will work out to approximately $1,976.00. Joe’s monthly mortgage payments will work out to approximately $3,334.00. Once Sally found out that Joe was paying $1,358.00 extra per month, she decided to invest that money with a financial advisor with an average rate of return of 7%. 15 years later, Joe paid off his mortgage, and Sally continued along. With the extra money, Joe decided to begin investing. He approached a financial advisor and invested $3,334.00 per month, the amount he was paying on a mortgage. After 30 years, Sally finally finished paying off her mortgage. The two had the same objective although very different strategies.

At the end of the 30 years, Joe and Sally met to compare their net worth.

Joe had his $500,000.00 mortgage paid off and contributed $600,120.00 to investments. The interest gained on his investment was $437,103.27 and his total portfolio worth was $1,037,223.27. Sally on the other hand had her $500,000.00 mortgage paid off and contributed $488,800.00 to her investments.  The interest gained on her investment was $1,099,236.64 and her total portfolio worth was $1,588,116.64. In total, I’ve compared their net worths below.

Joe’s Net Worth

$500,o00.00 (Home) + $600,120.00 (Contributions) + $437,103.27 (Interest Earned) = $1,537,223.27

Sally’s Net Worth

$500,000.00 (Home) + $488,800.00 (Contributions) + $1099,236.64 (Interest Earned) = $2,088,036.64