Paying off your home early really is a good idea

February 21, 2007 at 4:48 pm 2 comments

I was thoroughly amused and disgusted as I was reading an article on MSN titled “Being debt-free can be costly”. I would suggest that Kelli B. Grant (the author of the article) purchase a calculator that actually works. Let me explain why.

Grant, when covering the topic of paying off a home early had this say:

“Consider this: You’d pay $876 per month on a $150,000, 30-year fixed-rate mortgage with a rate of 5.76%. If you were to prepay your mortgage by an additional $100 per month, you’d pay it off six years sooner and save $42,703 in interest. Had you taken that $100 and invested it, earning a conservative 8%, you’d have $55,745 — enough to compensate for the interest paid plus $13,042 in profit.”

This is horrible advice! And, I’ll even use math to prove it.

If you have a mortgage payment of $876 a month and are paying an extra $100 each time, you’d pay off your home 6 years early (a 30-year mortgage, with pay off at 24-years). With Grant’s suggestion the homeowner would have paid off their home in 30 years and will have made $13,000 from the extra $100. That just might sound good to some of you, but here’s where this theory falls apart.

If you don’t take her advice, and use that extra $100 toward the mortgage you’d own your home in 24 years. Now, you have 6 years (working withing the 30-year timeframe Grant suggests) to use the freed up money to invest. Instead of merely $100, you’d have $976 ($875 plus $100). At the end of 6 years, you would have made $92,791.87 (8%), plus, you would own your home outright.

What would you do?

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Entry filed under: Money Fun, Real Estate and Mortgages.

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2 Comments Add your own

  • 1. Bob  |  June 16, 2007 at 9:52 pm

    What you are failing to account for in your counter example is that fact that you have to wait 24 years before you can put $976 a month towards savings. That’s 24 years worth of compound interest the $100 per month investment option has over the payoff early option.

    Invest $100 per month for 30 years = $136k and own a house
    Pay off early for 24 years then invest for 6 = $86k and own a house

    Reply
  • 2. john  |  April 5, 2011 at 12:00 pm

    A bird in the bush is worth 2 in the bush. I would like to know where you can get a conservative 8% guaranteed return.

    Reply

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