fbpx
U

Should You Prepay Your Mortgage and Mutual Fund Opportunities

February 11, 2008

One Pound | Photo by Rev Dan Catt
Have you ever wondered if you should prepay your mortgage?

In today’s show I give you the information to make an informed decision based upon your personal situation.

We take into account the analytical side of the decision as well as the emotional relief that can come from being DEBT FREE….

 

The analytical side of the discussion comes from a great article in this month’s Consumer Reports titled “Your Mortgage: It Rarely Pays to Prepay“. As you can probably see from the title of the article, they argue that that most people should not prepay and should instead use the money to invest. I think that Consumer Reports did a great analysis, but remember paying off your house versus investing in the stock market has many different factors beyond a simple math calculation. Depending on your personal risk threshold there are people that would prefer to be debt-free for the psychological satisfaction rather than maximize the earning potential of their investment portfolio. In today’s show I give you my insight to help you determine where you fall in this decision.

A few key facts from the Consumer Reports article…

  • When comparing paying $100 extra each month towards your mortgage balance or investing in a S&P 500 Index Fund Consumer Reports provided the following results:
  • After 10 years the S&P 500 investment on average produced a gain of $10,058 vs. $4,051 from the added mortgage payment
  • In about a 1/3 of the 10 year periods analyzed, paying down the mortgage produced a better return. However, the difference was pretty meager ranging from $1 to $2,799 of an advantage for prepaying your mortgage.
  • When the S&P 500 investment beat the prepayment, it did so by $70 to $16,763
  • It should be noted that when you extended the analysis out to a 15 and 20 year period of home ownership, the S&P 500 investment had the advantage 100% of the time. The average dollar gains from the stock investment grew from $10,058 in the 10 year analysis to $19,613 in the 15 year and $41,931 in the 20 year analysis.

Please note that this was primarily a mathematical calculation and there is much more that should go into your decision of prepaying your mortgage. You should also take into account:

  • Your risk profile
  • Your tax situation (if you make enough money that the Mortgage Interest Deduction is reduced or eliminated by AMT tax then you have more to consider)
  • How close you are to retirement
  • Upcoming cash needs (investments are much more liquid then real estate)
  • Peace of Mind factor…

**Fund Managers are using this time of volatility to welcome new investors**

I also wanted to let you know that with all of the volatility in the financial markets there are some very well know Mutual Funds that have been closed to new investors for a number of years that have reopened to new investors. Below I have provided links, so that you can research each of these options:

Thanks and see you next week!

Most Recent Episodes

Dave Ramsey vs. The Money Guy: Which Strategy is The Best?

Dave Ramsey has an incredible legacy of helping folks get out of debt and take control of their financial lives. We agree on a lot of things, but there are a few points of contrast. In this episode, we’ll discuss differences between The Money Guy Show and Dave Ramsey...

Top 4 Financial Mistakes We Saw This Year! (2022)

We saw some wild financial mistakes this year during the bear market. From making extreme changes to portfolio allocation, chasing the hot dot, and using too much leverage, we’ll talk about some of the biggest financial mistakes we saw in 2022 in this episode.   In...

How Millionaires Build Wealth! (With Dave Ramsey)

Join us for a very special episode as we welcome personal finance radio host and influencer Dave Ramsey to The Money Guy Show! There’s so much misinformation out there about building wealth. We had the pleasure of having a great conversation about how millionaires...

Do These 4 Things with Your Finances BEFORE 2023!

There are unique financial opportunities available at the end of the year - especially this year with the market down. In this episode, we’ll talk about what you need to do with your money BEFORE 2023! In this episode, you'll learn: What you need to do with your money...

How to Win When the Financial World is Burning!

Lately it’s felt like the financial world is in chaos, with rising interest rates, a falling stock market, and high inflation. Let’s talk about how to focus on what you can control and how to minimize the time spent worrying about what you can’t control. In this...

Financial Advisors React to RIDICULOUS Money Advice on TikTok!

The most powerful time to get serious about building wealth is when you’re young. So, what is the younger generation learning? Financial Advice (good and bad) is being produced in massive rates across online platforms and TikTok is the new frontier. Is there good...

Loss Harvesting: Why Wealthy People Love It (And You Should Too!)

Tax-loss harvesting: what is it and should you be doing it? In this episode, we’ll cover everything you need to know about tax-loss harvesting, including whether it makes sense for you, how much it could save you in taxes, and how to eliminate the downside of loss...

The Market is Crashing! (Where Should You Put Your Money?)

The stock market has not had a great year so far. You might be asking yourself, “Since the market is crashing, where should I put my money now?” In this episode, we’ll discuss how to invest when the market is dropping and how to make the most of your money. In this...

Will Rising Interest Rates Tank the Economy?!

The Federal Reserve is raising interest rates to combat inflation, and many are concerned about how it will affect the economy. In this episode, we’ll discuss what rising interest rates means for your wallet and how to make the best of it. In this episode, you'll...

How to Be Wealthy By Age! (Can You Catch Up?)

How much does it take for you to meet your retirement goals by age, and what are some common traps your peers fall into? Learn more about how to be wealthy, mistakes to avoid, and exactly what a little extra saving can do for your retirement income. In this episode,...