I have a bunch of cash laying around and I currently think that the stock market is overpriced. I can put this cash into a Vanguard Money Market account which invests primarily in US treasuries yielding about 1-1.5% or I could pay off extra principle towards my mortgage.

Am I right in thinking that if I pay off a chunk to the principle than that is the equivalent of an investment yielding whatever my mortgage rate is (in this case 3.25%) after one year? Similar to say paying off a credit card balance. The return is in the lack of interest paid.

I am not super familiar with amortization schedules etc and I know that interest is sort of front loaded at the beginning years of the loan so I want to figure out if I am thinking about this correctly and whether it is even possible to take such an approach without extra fees, etc.

Bart,

First you'll have to check with your lender if you are able to make principal payments (some loans do not allow for this). Second, yes, there would be a 'savings' associated with paying down your loan, but as to what exactly that equates to would involve creating a full amortization schedule and then applying the payment to see how it affects your future payments, etc (Each dollar you pay off early is not costing you 3.25% going forward, for how ever many years that you keep the loan). I would throw together a google doc demonstrating this, but work ldo. Assuming you plan to keep the house and it holds it value, you could think of it as a 3.25% 'investment', assuming no early payoff fees, etc, as you've stated.

Most loans don't have pre-payment penalties. Definitely check on it though.

Interest isn't front-loaded by anything else other than your balance owed is the highest up front, making the interest portion of payments higher. The amortization just does the math to figure out the flat payment structure over the life of the loan.

Overall, your thinking is correct. Paying off the mortgage (reducing principle) earlier is a guaranteed 3.25% annual return. The reason not to pay it off and invest it would be if you believe you can get a higher return in another investment (the market). The other factor that might be in play is if you get a tax deduction for mortgage interest (if you itemize taxes)...that would be another reason NOT to pay it off early.

The other qualitative reason to pay off early is the psychological benefit of being out of debt.

I'll chime in that it essentially locks your investment for the life of the loan. Let's say you live in your house for the next 10 years. How confident are you that 3.25%/yr will be better than the stock market from today's point over the next 10 years? I'm a big believer in not trying to time the market (google some studies about how well it works for most people), dumping all excess money in the stock market, and paying the min on a mortgage. This is mathematically optimal in most situations (until retirement where it's optimal to not have a mortgage). It is higher variance though. If you're a ways from retirement and not terribly risk averse, I'd do just dump it in the market and hope for the best. Treasuries isn't really a great option unless you need it for something in the near term. I'd rate the options like: stocks > mortgage > treasuries/mm/etc

Agree with all of this.

Pretty much correct. You are saving whatever interest you would have paid by having a larger principle.

The problem is if you want to take money "out" if something becomes underpriced, you will have to pay significant fees to do so in refinancing and getting cash out. You miss this opportunity cost or simply have to eat the cost of doing it. This also becomes worse if the rates are higher at that point in time, and it's tough to beat this level of interest rates.

Why compare an additional house payment with the return of the market ?
Shouldn’t we compare it to a 10 years bonds ?
payment on a house is a lock free risk return while the stocks aren’t .

If you live in the US and compare to a 10 years bonds that returns you today , risk free, only 0.5 % interest and can « make » a return risk free of 3.25% , seem to me a good investment cause u can’t find better anywhere else with risk free interest.

of course you can use the money and put it elsewhere but that ain’t free risk free no more since you can lose it AND you need to be sure to make over 3.25% return .

If OP want to make a safe bet I think it’s a good idea to make the payment , especially if it’s early in his lease since he will gain huge compound effect over time .

If his not conservative than I guess he could find better return elsewhere than paying the additional house payment .

but being free of debt and owning an house is a huge advantage in the long run and more safe as well .

Ps: or split the payment in 2 part , one on the house and one in the market where he think you can make greater return than 3.25%

If you pay off principal you aren't necessarily being locked in for the life of your loan. You can always extract some of that equity later with a HELOC and re-invest in something else if you want.

Yes, this is true. But I think the point here is that in the future if I do want to pull equity out the interest rate is almost always going to be higher than what it is now.

This is a math problem. Run some scenarios and see where you end up.

Why would you not throw that money in an index fund and get 8-9% with great liquidity?

He has written so many books, many with overlapping messages, but Robert Kiyosaki's https://www.amazon.com/Rich-Dads-CAS...s%2C179&sr=8-1 can probably help with this decision.

Rather than Didace's math problem or Ten5x's equities, how about a thought experiment and likely more real estate. I'll use rough numbers. Let's say that you bought your house for $500k, put down $100k and have since paid off another $50k in principal. Let's also say that your "chunk of cash" is $100k and that your mortgage is $3k / month.

Putting that $100k into your home is derisking the asset (Kiyosaki would be the first tell you that your home is really a liability...the truth is that it is an asset on your balance sheet (hopefully) but acts like a liability with respect to cashflow).

But if you buy, say two four families that each yield $1.5k a month in cash flow, you have added risk (more leverage as well) but you have basically gotten rid of your mortgage.

So my suggestion on what to do with your capital is to create a passive income stream that offsets your liability. Equities and treasuries will almost certainly not have enough return (equities will appreciate in price) but you will be hard pressed to get enough dividends for it to make sense. Food for thought.

Is paying off a mortgage in a lump sum a better choice if you have money to do it? That is releasing a huge debt. Of course you still have to pay property tax but much less of a burden. Being debt free with an asset seems much better +EV and you can save your money for other things. Or is it better to wait and just put that money in market or something? (assuming you're not at top of a bubble lol)

Generally, it's going to always be better to invest in the market, especially if you aren't already saving in a huge way, aren't in retirement or don't already have enough saved for retirement.

lol rand - suggests that rather than doing math he should do this. Then does math.