My adjustable rate mortgage resets about a year from now in 2022 and if interest rates are at the same levels next year as they are today, the rate on my mortgage would drop from 3.375% to about 2.5% which would lower my mortgage payment by about $55/month, from $637 to $582.
According to the terms of my mortgage, the lowest my interest rate can go is 2.25%. Since it can’t go to zero I was planning on paying off my mortgage next year assuming I had approximately $122,000 in my savings account by then. Up until last year I thought paying off my mortgage as soon as possible was the most financially savvy thing to do1 because I’m estimating that would simply save me about $39,000 in interest costs by doing so.2
Paying off my mortgage early was initially the plan, but as I asked others in message boards and forums about their own experience and strategies and read about the pros and cons as well, I learned I could maximize my earnings by not paying off my mortgage and instead investing that money into something that’s more likely to get me a higher return.
The following video is a little lengthy and is actually comparing a 15-year mortgage versus a 30-year mortgage but I think it does a really great job at explaining conceptually how this works:
Two people with the exact same cash outflow, but by investing the difference one of them has over $377,000 more than the other person by the time they’re 60 years old!
Yes, the video makes some assumptions about mortgage rates and the rate of return on investments but they are all very sensible to me.
It’s NEVER BAD to payoff your mortgage early or be debt free in my opinion but if you’re looking to maximize your wealth and net worth, this type of approach might be something you wish to consider.
As for me, I’m currently leaning towards keeping the money I was going to use to payoff my mortgage and dumping it into the stock market but the thought of being mortgage free in my 30’s is so incredibly enticing to me.
- When my interest rate resets in April 2022, I will have paid about $57,000 in interest on my single family home since 2011.
- It’s hard to get a good estimate of how much in interest expense I might save by paying off my mortgage next year since the rate will adjust every year, but for this exercise, assuming it somehow stays the same for the remaining 23 years of the mortgage, I would save about $39,000 in interest costs.
