Paying off Your Mortgage Early–A Calculator

I’ve been arguing with a commenter on an earlier post about the merits of paying off one’s mortgage early. In that post and in its followup, I offered the idea that you’re often better off not paying off your mortgage early, from a pure “numbers” perspective. The commenter, who sells a “solution” to paying off one’s mortgage early, apparently disagrees.

I took a bit of time to create a spreadsheet to answer this question. I hope to change this from an argument between me and a commenter to a question of “what the numbers say”. You can enter your own inputs, validate the spreadsheet, and see the results for yourself. The spreadsheet assumes a 30-year, monthly mortgage. I invite anyone to point out minor flaws or glaring errors in the calculator, its assumptions, or the calculations.

My spreadsheet attempts to answer the question: if you have $X dollars a month (where X is your mortgage payment) and sometimes have extra money to either invest elsewhere or pay down the mortgage, what are the effects of the two choices on your net worth? The answers vary according to the assumptions used. However, I think using realistic numbers you’ll generally find that you’re better off investing the money in an IRA than you would be prepaying your mortgage.

The calculator’s inputs are mortgage APR, principal, tax rate, and investment rate of return. Assumptions include:

• The “alternate investment” is a Roth IRA, a wise move for many and an assumption that simplifies calculations. It gives no immediate tax benefit, but returns compound and can be withdrawn tax-free.
• The investor has adjusted his tax withholding to account for the deductions that mortgage interest provides. The extra cash flow from decreased withholding is invested in an IRA.
• If the investor prepays the mortgage, “mortgage payments” at the end of the period are invested instead of going toward mortgage payoff.
• Any time the investor makes an extra payment toward mortgage principal, that money could alternatively have been invested in the IRA.

I’m attaching I will attach, once I figure out how how to do so in WordPress, the calculator. Plug in your assumptions, and see for yourself whether your net worth would be higher if you prepaid your mortgage or if you instead invested that money in your IRA. I invite “Investment Strategies” or anyone else to critique this model.

Update 2008-09-17: Apparently, hosted WordPress doesn’t allow attaching Excel files. However, the file should be accessible through MediaFire, a free (and ad-supported) file-hosting service that I’m now trying out for the first time.