ROI on mortgage pay down?

Question

I just completed a BRRR, and in looking at the amortization schedule I noticed how little principal is paid in the first years.  I was going to invest 10k in A RE Debt fund.  However, I am now thinking a better return would be to jumpstart the mortgage paydown with that 10k.  So here are my numbers, and maybe you can help me see if I am making a mistake in my thinking....

198k loan, 358 payments left 7.5% interest.  My monthly payment is 1390.00. When I put in chat GPT how much I would save with a 10k principal payment, it said 83k saved on interest, and 6 years.  However, when I put in Dave Ramsey calculator, It said 66k saved, and 4yr 7 mo save.  So first, which is correct?

I figured if I save 82.8k with a 10k investment, that is a 828% ROI, divided by 24 years remaining on the loan, and that provides a 34.5% annual ROI.  Now, obviously I need to wait 24 year to realize those gains.  But that seems like a prudent investment.  Am I looking at this wrong?  I know there is a lot of opinions out there about whether to leverage, or pay off properties.  I am not necessarily wanting to open that can of worms, but it seems a principal payment at the BEGINNING of a mortgage yields a huge benefit that cannot be matched say 10 year down the road.

Allan C. · Answer

No matter how you dice it, you are saving 7.5%/yr. To do a proper analysis you have to compare opportunity cost. Let's ignore tax considerations for now to simplify.

So base case is you take your $10k and drop it into T-bills at 3.5%/yr yield. Alternatively you can compare other investment yields of your $10k. Investing is all about comparing one type of yield vs another.

don't get confused by amortization schedules because the mortgage payment reflects principal and interest payments. In theory you only lose the interest portion to the bank. The principal is your equity. After you internalize this concept, we can then talk about time value of money and NPV - which is a big reason why you wouldn't want to accelerate pay-down of your mortgage.

Josh L. · Answer

@Matt Williams Good question. It really depends on your goal. If your focus is debt reduction which I would lean toward then I’d look at it more as a guaranteed 7.5% return, which is the interest rate on your mortgage.

Eric Bilderback · Answer

7.5% but you will not receive the tax benefit of the interest deduction.  If you are paying 25% of your income to the IRS then you will be getting 75% of the 7.5% about 5,5% return.  I like paying off rental properties in theory but hart to get to excited about 5,5% after tax return.

Benjamin Louie · Answer

@Matt Williams Matt, you’re thinking about this the right way. Extra principal payments at the start of a mortgage give huge interest savings over time. Calculators may differ slightly, but the principle is the same: early payments = big guaranteed ROI. Definitely a smart move if you don’t have a higher-yield, low-risk investment opportunity elsewhere.

ROI on mortgage pay down?

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