Should you pay off your mortgage early?
I created a model to compare a 15-year fixed rate mortgage payoff vs. a 30-year fixed rate mortgage payoff to teach my son about the time value of money and thought it would be interesting to share the results here.
The short answer is: The lower your mortgage rate is below what you can make on your investments, the better off you’ll be paying off your mortgage over 30 years and investing the difference between the 15-year payment and 30-year payment each month.
In the table below I’ve shown a comparison of two scenarios with a 3.5% fixed rate mortgage, 3.0% inflation, an 8% return on your investments, and a $500,000 house with 20% down ($400,000 mortgage).
The blue table on the left shows a 30-year mortgage with the difference between monthly payments invested, while the orange table on the right shows a 15-year mortgage with no investment during the first 15 years until the mortgage is paid off.
If we take the same scenario shown above and move the mortgage interest rate lower to 2.5%, it becomes even more compelling.
From the stress testing I’ve done with this model it works even if your mortgage rate is 6%, investment annual returns are 8%, and inflation jumps to 10%, so it should apply under almost all circumstances so long as the amount you make on your investments is more than your mortgage interest rate.
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