Should I pay off my mortgage? Home mortgage vs. high yield savings account. Safe bets
**Update -I was so wrong…so so wrong. It shows how one person on the internet saying something works in a certain way and you blindly believe it, you could be made to look like a financial idiot, which is kind of what this post looks like when I reflect back on it. Luckily I have a friend that within two seconds called out, “You are forgetting to deduct your monthly mortgage payment from your $250k savings deposit”. That summed it up and closed the case. What’s funny is even after he said it, it took me an hour to wrap my head around his suggestion. I was so stuck on making the theory I had read be right that I couldn’t see from the outside in.
So in the end - save yourself the time and probably don’t read this post. I’ll keep it hear to remind me of my occasional poor thinking.
I see the question non-stop "Should I pay off my mortgage". One answer recently caught my attention for its simplicity and equal risk acceptance as paying off your mortgage. The answer was, If a high yield savings rate can beat your mortgage rate that's a no brainer to NOT pay off your mortgage.
I thought about this answer. One of the biggest reasons for paying off a mortgage is the feeling of safety it provides. I thought the answer of putting the same cash you would have used to payoff a home into a high yield savings account would also provide a similar sense of safety. At any point, that dollar amount would never shrink. If you lost your job, et al' life happened, you would always be able to cover your mortgage. It's a simple answer that doesn't involve "leverage" or "risk". It seems like a savings accounts is possibly a safer option than paying off your mortgage as well, but I haven't drilled into that idea and its emotional impact deeply.
Then it bothered me - Is this really true? If my home payoff was $250,000 and I had $250k in cash. What's the difference between paying off your mortgage at 4.5% APR vs. A high yield savings account at todays rate of 2%?
Here's the result:
Mortgage Interest Lifetime cost of 30yr loan on 250k @4.5% = $206,016.78 https://www.mortgagecalculator.org/calcs/compare.php
Savings Interest earned on initial $250k funding @2% 30yrs = $205,302.24 https://www.bankrate.com/calculators/savings/simple-savings-calculator.aspx
The difference is $714.54 over 30 years is saved by paying off your 4.5% mortgage.
What would be the savings rate yield need to be to balance the two? 2.00523% In today's ultra low savings rate, Ally.com is advertising 2.2%, meaning right now dumping that same $250k into a low low risk savings account would produce $233,405.89. That's $27,389.11 more cash than paying off your mortgage would have. That opens you to future interest rate growth as well. If in 10 years we are near 5% interest rates, the profit increases.
The same could be true if it dropped below 2% in which case you would fall behind your mortgage loans savings, but by how much? I would say if the premium is $27,389.11, which was your profit potential then you might set that as your lower boundary of risk tolerance, which would be a savings interest rate of 1.8%. If you think you can earn a minimum of 1.8% average return over 30yrs in an ultra safe way, such as savings accounts your downside protection is set. No increase in risk. Similar feeling of financial security as paying your mortgage off. On any day of the week, any year of your life, you could simply transfer funds and payoff your house. You are simply playing the game of can I earn more safely in a high yield savings account. At 1.8% min interest needed that seems highly likely.