Let’s say that you have $500 left over each month after expenses and savings. In most cases, investing your $500 in the total stock market or S&P 500 will grow your net worth faster than paying off your home early with an extra $500 per month in principal payments. However the stock market is now projected to earn smaller returns of 4% per year and 30 year conventional mortgage rates shot up to 5.14% on April 13th, 2022. Whats more, the S&P 500 is now in the bear market. What is the smarter option? Invest now and make minimum payments on your mortgage or pay down your mortgage early, then invest?
Investing $500/Month
In this example, you invest $500 per month into a brokerage account that returns an average of 4%.
- After 10 years, you will have a balance of $74,370
- At 20 years, expect around $184,500.
- If you continually invest $500 per month for 30 years, you should have about $348,700.
At the end of year 30, your total contributions would be $180,000 and your earnings would be about $168,000.
According to the National Association of Realtors, the median home price in America was $392,000 in early 2022. That is up from $305,000 in 2021. The average downpayment is 12%. If you take 12% off the median home price of $392,000, we can assume that the median mortgage is $344,960. Let us also assume that the value of the property be worth $558,000 in 30 years. That is a 50% improvement in value.
Our example will be a 30 year conventional mortgage at 5.14% and $344,960. If you only make the minimum mortgage payment of $1881.45, you would have paid $332,361 in interest after 30 years.
If you remove the value of the house and your contributions, you have lost -$164,361. If you include your contributions and equity in the house, you would have netted $574,339.
Paying $500/Month Extra Towards Mortgage Principal
Using the same mortgage and home value in the previous example, what if we put that $500 per month towards your mortgage principal?
- After 10 years, you would have paid $144,362 in interest.
- You would finish paying off the house after 19 years with a total of $194,816 paid in interest.
- Starting at year 20, you would invest $500 per month PLUS the $1881 you used to pay for your mortgage at a return of 4%. After 10 years, you would have earned $351,347.
In this example, you have made $351,347 after investing the $500 plus your old mortgage payment in the stock market for 10 years. Your house is worth $588,000 and you paid $194,816 in interest to net $393,184 in the house.
Conclusion
If you invest $500 per month for 30 years while making the minimum payment on your 30 year, 5.14% $344,960 mortgage, you will have ended up with $574,339. Paying the extra $500 towards your mortgage each month allowed you to pay off your mortgage early at year 19, at which you were able to start investing the difference in the stock market for the next 10 years. After 30 years, you would have made $744,531 between your house and the stock market.
The math clearly tells us that, at least for now, paying off your mortgage early makes more sense than investing any extra cash you have. I am not saying don’t invest anything at all. You should still try to invest at least 15% no matter how the market is doing. Things could change drastically as mortgage rates go back down and stock market returns go back up. Check out my Loan Amortization Schedule Template. This is the template I used to calculate mortgage interest costs and savings by paying an extra $500 per month.
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