Hello, I’m having some trouble understanding the math on making a one-time principal payment versus investing that money elsewhere. So let’s say this would be for a new investment property and the mortgage is $200k at 7%. If I made a principal payment of $30k right on the first day of the loan, how does that compare to investing $30k in the stock market at an assumed 7% return? It seems like the mortgage would be paid off in about 19 years and 8 months, saving around $135,474 in interest payments. Meanwhile, the $30k in the market at 7% for that same period would yield an ending balance of $113,501.66. That makes it seem like the principal payment yields a greater return of $21,972.34. Is this basic math correct? I’m aware it’s not so simple and doesn’t factor in other considerations like interest deduction and depreciation. What’s the right way to calculate the total ROI for this?
There’s nothing to understand. Kids on this forum will fire up their apps and talk about their gains, all while making someone else rich by paying off someone else’s mortgage. The reality is, the guaranteed path to wealth is through real estate investment. Rather than making a lump sum payment or investing in the market, you should maximize your leverage and put that cash towards purchasing more investment properties
Cap gains on your investment to consider?
Quincy said:
Cap gains on your investment to consider?
Sorry, just want to clarify your question. Are you asking about capital gains on the sale of the house, or do you mean I need to consider the capital gains from the $30k growing to $113,501.66? That wouldn’t apply to the principal payment since its ‘return’ is through minimizing debt obligation, right?
@Skyler
For primary residences, part of the capital gains isn’t taxed. For stocks, realized gains and dividends are taxed unless it’s in a tax-advantaged account. The difference between your two scenarios will end up being about tax strategy
@Roan
But what about for investment properties? If this isn’t my primary residence, wouldn’t that consideration be moot? I assume both would be fully taxed since they wouldn’t be in a tax-advantaged account
There isn’t any additional taxable gain from paying down a mortgage or putting more cash down. Gain is based on the purchase price versus selling price. By the way, you’d likely be slightly better off by using the $30k as an additional down payment. If you go for a 20-year term instead of 30, you’ll get a slightly lower interest rate
No capital gains exemption for investment properties. You might want to check tax topic 701
Gains on your investment if you choose the stock market would factor in too
The math is pretty much the same. Saving 7% on interest is like getting a guaranteed return of 7%
You’re looking at a guaranteed 7% return by paying off your mortgage early versus a possible 7% from the stock market. Plus, you pay taxes on the returns from the market. Personally, I’d go for the guaranteed return. Or you could split it: half in the market and half towards the mortgage
Markets are risky, while paying your mortgage isn’t. The economy could tank, and if you put $100k in the market, you might find yourself down $30k plus all the additional interest you would have paid. If we knew for sure the market would go up 10% each year, banks wouldn’t be giving out loans since they could make more with stocks. Basically, you’re betting the market will outperform your mortgage interest rate, which is risky. Paying your mortgage is a risk-free 7%, which is a solid deal, so why not take it? If your interest rate were like 2%, it would be less risky to invest in the market since it’s more likely to beat that rate