Return on Investment from Paying Off Mortgage Early

[James Orr]

Perhaps someone can help clarify my thinking on a financial question.

For this discussion let's assume we're talking about a $100,000 30 year fixed rate mortgage at 5% with a payment of $536.82 per month.

Not that you would do this, but... if, the day after you got your mortgage, you went into the bank and the paid $100,000 back you'd be getting essentially $536.82 per month more in cash flow for the next 30 years on a $100,000 investment. That means you'd be getting 6.44% return on your $100,000 for the next 30 years.

$536.82 * 12 = $6,441.86 per year

$6,441.86/$100,000 = 6.44%

First, is that right?

Of course, you would not longer be leveraged, so your returns from appreciation and depreciation would go way down. And, your return from debt paydown goes to zero. I do understand that.

Second, and here's the next question. Imagine I did NOT pay it off, but paid on the loan for 10 years (120 months). At that point, the balance would be $81,342.06.

If I went to the bank with $81,342.06 at that time and paid off the loan, I would, again, save myself the $536.82 per month payment for the next 20 years. And, my return on the $81K and change would be 7.92% per year.

$536.82 * 12 = $6,441.86 per year

$6,441.86/$81,342.06 = 7.92%

Is that right?

And, finally, if I did not pay it off early and we jump to year 20, I would owe $50,612.27. If I walk into the bank with that and pay it off, I save the monthly payment again for the next 10 years.

$536.82 * 12 = $6,441.86 per year

$6,441.86/$50,612.27 = 12.73% for 10 years.

What am I missing? Thanks in advance.

[Chris Mason]

Go spend another 5 hours with your spreadsheets, you will know you are done when you conclude that the marginal ROI (before tax implications or opportunity cost) exactly equals your interest rate. This will remain true if you pay it off in month 1, or month 359.