Hi, I am currently contemplating whether to pay back the mortgage of my house early with additional payments or not. I did some calculations but I am not sure, if I missed something. Please share your opinion on this.
Principle = $400k, Interest = 3.5% p.a., Duration = 30 years
This comes to approx. $1812 monthly payment with annuity payment plan.
Assumption:
- Inflation adjustment: 2% per year
- Mortgage interest tax deductible at 35% tax rate.
- If I do not make pre-payment, I earn 1.5% interest on my savings.
Scenario 1: Payback early in 10 years (+$30k per year additional payment)
Gross total payment = $485500
Net total payment = $455600 (gross - tax return on mortgage interest)
Inflation adjusted net payment = $405270
Scenario 2: Payment in 30 years with only monthly payments
Gross total payment = $652500
Net total payment = $564150
Inflation adjusted net payment = $413500
Inflation adjusted savings + interest = 140500 + 71500 = $212000
According to this calculation, I pay almost the same amount in both scenarios, of course depending on inflation. Yet with only regular payment (scenario 2), I also save a good chuck of money.
Scenario 2 is a clear winning strategy by miles, did I miss something?
Edits:
I am based in Europe, used $ signs because that is what my keyboard has. And mortgage interest is a standard deduction in my country.
1.5% interest on savings is to consider worst case for the next 30 years. I am getting better rate on my savings at the moment. Thank you for the suggestions though.
original posted by Level-Ad-2170 to r/personalfinance on Mon, 25 Mar 2024 15:15:58 GMT.