Dumb-Guy Mortgage Math

I was playing around with this mortgage calculator tool to see what happens to my mortgage payments when I put more down. You've probably heard how making a few extra payments can shave years off of your mortgage, and my basic goal was to see, "is it worth it?"

Not including taxes and insurance, my payment is about $1650, 6.625% interest, on a 30 year loan. So I thought I would see what would happen if I made one extra payment of $1650 at the beginning of my loan. Big picture, it shaved 7 months off my mortgage, which means that $1650 returned roughly 7x. Not bad!

This means that each year going forward, an extra $93 went towards principal instead of interest (not counting the $1650 that I added). Technically, it snowballs a bit from there, but I found that overall I was earning about a 6.6% return, which not surprisingly matches the interest rate on the loan.

That 6.6% return doesn't look astounding on paper, but the long term results are decent. As always, though, you need to look at opportunity costs.

I made another column showing the growth of $1650 if it is put into stocks. In year one (assuming 10% returns), it grew by $165. That beats $93 for paying down the loan. Moreover, by year 30 it was worth or 28,792, or 17.45x more! That works out to 17.45 mortgage payments, almost a year and a half. A single payment grew into more than my original downpayment!

What's crazy is that if I left it alone instead of using it to pay off the mortgage, it grew by $2,617 in year 30. In other words, year 30 more than doubled the initial investment. And it only gets better from there. In year 35, it grew by $4,215, or 2.55x the original value in just one year!

The takeaway? Even with mortgage rates at 6.625%, you're still better off using extra cash to buy stocks, preferably inside tax-advantaged accounts.