Pay off loan before 30 year vs. invest money elsewhere?

[Marylin OShea]

I'm working on my first deal, due to close May 12. Got a 30-year loan, and I am interested in paying it off sooner (I chose 30 over 15 to have the flexibility). My strategy is to buy & hold.

Now, I'm trying to figure out whether I'm better off paying the 30-year loan in 15 years thus reducing some of my investments elsewhere, like a Roth IRA since I've maxed out my 401k.

My question: is it worth doing?

I am looking at different amortization tables for my loan of $101,250 over 30 years at 4.625%.

That loan paid early with an extra $300 principal per month adds up to: $36,400 so it would be paid off in April 2031, roughly 14 years from now. (that's 168 payments) 

I look over to the 30-year table, at that time (Apr 2031), my interest total would be $56,700.

(this makes sense, a 4.625 yield compounded annually over 14 years on a $300 monthly deposit generates me about $20,300 of interest, I checked with a calculator like this one)

Returns on my Roth IRA are (maybe) 7% per year. Though I recently moved my allocation to some longer-term Vanguard funds and the returns should be sensibly better.

The beauty of re-channeling my investment funds into an earlier loan repayment is that in 14 years I'd own the house free and clear and my monthly cashflow would increase by $700.

Also I could tap into that equity with a HELOC and repeat the investment process into another property or two.

Am I looking at this right?

What would you do?

Thanks for reading and sharing your insights.

M

[Brian Nordman]

The way I like to look at situations like this is plain old opportunity cost. If you put that extra $300 towards your principal you are only saving yourself 4.6% in interest. Whereas like you stated, if you invest that $300 or rather save it for a future property, I can safely bet you will return more than 4.6%. Anything you make in return beyond that 4.6% would  be considered your gain in this situation. If I were you, I wouldn't pay down the loan faster I would put that extra money towards your next investment. Thanks to compound interest that $300 will be worth more in 30 years if you were to invest it today rather than make extra debt payments.