Pay Off Debt or Invest – What are the Facts?

The topic of paying off debt vs. investing is hotly debated, especially among financial planners and famous radio personalities. To give them some credit, they are all correct in one way or another – but the problem with dogmatic answers to this question is that they usually don’t consider the personal part of ‘personal finance,’ nor quote accurate investment data. Debt isn’t a one-size-fits-all topic, nor is investing – thankfully!

Debt pushes today’s expenses into the future, while investing saves for future expenses today.

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Real Estate: The True Cost of Home Ownership

For most Americans, home ownership is viewed as a symbol of freedom and financial success. You can paint the rooms and renovate without permission, play the music louder, and raise your family in a place that feels more like a home than a house.

The availability of mortgage lending and historically-low interest rates makes this dream a reality for many young professionals who are eager to go from renters to owners. This desire to own property often results in confirmation bias when comparing the costs of renting with buying. The issue with this mindset is that it usually starts and ends with comparing the cost of rent payments vs. mortgage payments – “why pay $1,200 to rent that 1-bedroom apartment when you could own a 3-bedroom house for the same monthly payment?”

I do believe that home ownership can provide lifestyle value and potential asset growth, but let’s measure twice and discover the hidden costs of this major decision before taking action.

The True Cost of Home Ownership

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Mortgage Flexibility: 15-yr vs. 30-yr

The ’15-year vs. 30-year’ mortgage debate has been rolling on for years, focused primarily on the total interest saved by opting for the shorter term. Whether buying a first home, refinancing, downsizing, or buying the dream retirement home, there is an impulse to choose the shorter term when affordable.

The argument has plenty of good math involved, and we’re down for that:

A 30-year loan for $350,000, with an interest rate of 3.5% and minimum monthly payment of $1,572, comes to a whopping $215,796 in total interest paid – that’s like another house!

If the same loan were paid off more aggressively over 15 years, with a monthly payment of $2,502, the total interest paid would be $100,376 – a huge reduction of $115,420.

But wait – what about the lower interest rate when choosing the shorter term?”

Okay, let’s do that math too:

A 15-year loan for $350,000, with an interest rate of 3.0% and minimum monthly payment of $2,417, comes to a $85,066 in total interest paid – an improvement of $15,310 vs. choosing the 30-year mortgage and paying it off aggressively in 15 years.

From a completely objective, math-driven analysis, taking on the 15-year mortgage is a no-brainer.

BUT you are the type of person who wants to think about their money in terms of risk – good for you!! Having the 15-year mortgage is fine and dandy, until life happens. Job loss, disability, medical bills, and increased lifestyle expenses can all derail the path to financial independence – particularly if you are highly leveraged with an illiquid asset (more like liability) in your primary residence.

So, how do we solve for uncertainty in our financing decisions?

We use the Mortgage Flexibility Calculator!!

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