For you all business math guys.... Lets say you buy a $100,000 home at 3% interest and pay the minimum payment monthly. Now lets say each year you get an extra 10 grand all at once, which will be the quickest and cheapest way to pay your house off completely. a) Take the 10 grand and put it toward the house each. or b) Invest it each year in any stock, bonds or securities etc that earn 5% interest, keep making minimum monthly payments until the day your investment is enough to pay off the house in 1 lump payment?
Well option B has a lot of variables. Stocks you can easily outperform 5% but you can also lose that money quickly. The stock market is a lot like Vegas in that respect. Bonds youre not getting 5%...bonds are generally speaking a long term option. And securities can fluctuate. My personal philosophy on debt whether it be car loans or college loans was to just get rid of it before doing anything else. Before I allowed myself certain vacations, certain rent costs, I wanted to prioritize getting out of debt because when you have debt, you never really have money. Someone always has a legit claim to that money or car or house before you do. I paid off my college and car loans with the quickness....therefore A would be my choice
Assuming you're an average, I agree with Boik. Get rid all all debt asap. You'll be the better for it. You can weather many a "fierce storm" a lot better with no debt. making more interest on savings than what you pay for a mortgage sounds like the right thing to do but 5% only earns you $500/yr on that 10 grand. That doesn't realize any great benefit. IMO, that strategy works better for the wealthy and you're better off with as little debt as possible. You would be surprised at how little you can live comfortably on with no debt. It leaves you with many more better options.
In addition to the stock market volatility Boik mentioned, you also have to consider human behavior. If that money is accessible to you in a brokerage account, you're likely to dip into it at some point. Maybe it's an "emergency", or you just saw a nice car you really wanted. Either way, the odds that money stays in there to accumulate a nice lump sum to pay off your house, if you follow the trends of the average American, are slim to none. Put it towards the debt immediately would be my vote. A lot of people think the key to financial independence is to make more money. In reality, the secret is to be debt free. It's very liberating. Debt does nothing but tie you down to jobs you don't like and places you don't want to live.
Pay off the house only until interest is paid The total cost of the loan would be $139,776.00. Assuming minimum payments of 421.60 a month Return of 5% on stocks or 500.00 a yr The note costs much more....pay off the house There does come a time, when interest will be paid and then your minimum monthly is all principal. This usually occurs around year 15. At that time invest the money because the loan is free at that point.
