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.