Pay Off The Mortgage or Re-Invest?
If you have a chunk of money you may be wondering what to do with it. Should you pay off your mortgage? Move up to a larger home or one that is in a different area? Or should you invest in a second property? These are all great questions and while you may have your own personal reasons for making a change, math is required in order to evaluate your options. For our examples, let’s assume we have $100,000 that could be used to pay off a mortgage, move up to a larger home, or be used as a down payment for another property such a short- or long-term rental:
Paying Off a Mortgage Early
In addition to the monthly payment that is no longer a factor, interest on the mortgage balance is saved:
| Mortgage Balance | Interest Rate | Payments Remaining | Interest paid over 10 years on mortgage balance – represents money saved |
| $100,000 | 5% | 120 | $27,278.62 |
If the mortgage is paid off early, $27,278.62 is saved (which represents return on investment), but remember, there may also be tax implications and that money is no longer available in a savings account to earn interest. However the property can continue to gain appreciation as a free-and-clear asset.
Upgrading to a Larger Home or New Area
Now let’s assume that the $100,000 is combined with the current equity in the home to upgrade to a larger home. We are assuming the value of the new property is $700,000, it appreciates an average of 5% per year, and we have put 50% down. The return on investment is calculated on the $100,000 investment, not the additional $250,000 that was used from the first property, although both were required for this investment:
| New Mortgage Balance | New Interest Rate | Payments Remaining | Equity Now | Projected Equity in 10 years | 10-Year Return on Investment |
| $350,000 | 4% | 360 | $350,000 | $877,162.79 | $527,162.79 |
Purchasing a Second Property
What if we used the $100,000 as a down payment to purchase a second home or income-producing property? Let’s assume we purchase a $500,000 property, put 20% down, and it appreciates at an average of 5% per year:
| Mortgage Balance | Interest Rate | Payments Remaining | Equity Now | Projected Equity in 10 years | 10-Year Return on Investment |
| $400,000 | 4% | 360 | $100,000 | $508,368.91 | $408,368.91 |
And that is not including the short- or long-term income that can be used to help pay down the mortgage or possible tax benefits!
We haven’t factored in closing costs or other costs to purchase or maintain any of the properties. These examples are no guarantee that any of these investments will perform as expressed here. If this article has you thinking, reach out and we would be happy to help you run examples.
The Harlan Team 