Mortgage Payoff Math (is Awesome!)

[Malcom Smith]

Hi All,

I'm doing the math on the benefits of investing 2K a month into paying my mortgage off early and it looks too good to be true so I'd really appreciate others thoughts on my math:

$755K, 28 yrs remaining on a 30Yr fixed @ 3.625%. $3,580 monthly payment

$448K in interest due over the remainder of the loan.

Accelerated schedule (no-refi): $2K additional payment per month will finish the loan in 15 Yrs

$217K in interest paid over next 15 Yrs saving 230K (448 - 217) in interest payments.

230K / 15 = $15K saved per yr for $24K per yr in addition payments = 63% ROI on the additional payments!

Is this right? I'm thinking this is the best ROI I can get on 2K.

[Bryan Hancock]

Your math is not correct because it doesn't account for the time value of money.  The Mortgage Professor has spreadsheets on his site devoted to discussions like this.  I would suggest looking at those.  

The "ROI" you can get on your investments just needs to exceed what your interest rate is on your note. If it does investing outside of your mortgage dominates prepaying it. If it doesn't you're better off prepaying the mortgage. This analysis ignores tax considerations.

To me if you intend to prepay the mortgage and can tolerate payment variance you're better off using an ARM. Prepaying the ARM frees up cash flow in future years in case it is needed. From what you have written and your goals this may be a better option for you because the interest rate risk transference to you as the borrower will allow you to get a better rate on the loan as opposed to a fixed-rate mortgage.

You first need to decide if prepaying your mortgage is right for you. If you decide that it is an ARM is likely better for what you are trying to do. Most real estate investors can earn FAR better yields on their money than the price of money on their loan and thus they do not prepay the loans. That is why fixed-rate FNMA loan product is favored in most BP threads.