Pay That Mortgage Off Early, Or Not?
Pay that Mortgage Off Early, Or Note and Phyllis Stone. There are a lot of homeowners who ask if they should pay off their mortgage early or not? What do they mean by this? Some homeowners are asking if they should pay extra money to their monthly mortgage payment? This is seemingly a simple question to answer. No one really wants to pay more in interest. Further, no one really wants to have debt, especially for those in the financial independence, retire early or ‘FIRE’ movement. Let’s take a look at the question in little bit more detail.
To start, it does make sense to pay some extra money to your monthly mortgage payment. Over time this saves on total interest and knocks time off your loan by reducing the principal. The earlier you do this the more it makes sense, at least to me.
Pay Mortgage Off Early
Let’s take a look at an example. Let’s say you buy a $400,000 house (we’ll use round numbers to make this simple). You put 20% down and finance the rest at 3.5% over 30 years. If have a good credit score you could probably do better than 3.5%. So, your mortgage balance is $320,000. Now I use one of the many available mortgage calculators. As you can see in the table below your monthly payment is $1,436.94. Over the life of the loan you will pay $197,299.48 in interest.
DividendPower Mortgage Repayment Example
Now what happens if you round up your monthly payments to $1,450 per month. We’ll call this Case 1. That’s not much extra per month and doable for almost everyone. I mean it’s an extra $13.06 per month. You can see that you pay $193,759.09 in total interest and pay off the mortgage loan six months early. So, in this case you save about $4,500 over the life of the loan.
Now let’s try rounding up to a monthly payment of $1,500 per month. We’ll call this Case 2. This is an extra $63.06 per month. This is also doable for almost everyone. In this case, the benefit of the extra payment is more apparent. The total interest paid is now down to $181,360.03 and you pay off the mortgage loan 2 years and 2 months early. In this case, you save about $16,000 in interest over the life of the loan.
Invest Instead of Pay Mortgage Off Early
There is, however, a counter argument. What if you invested that money instead of paying off debt? Well, if one assumes that you get an 8% annualized total return over the long haul then it makes sense to invest the money. With that said, the money we are talking about is small, but it does add up. If one starts at $0 initial balance and puts away $13.06 per month and it earns an annualized total return of 8%, then you end up with about $19,464 after 30 years. If you save and invest $63.06 per month then the dollar value is about $93,982 in 30 years. Seemingly, it makes more sense to invest based on this relatively simple analysis. But the caveat is that this depends on the annualized total return that your investment achieves.
The scenario can be more complex though. One must also account for the cash flow after the mortgage is paid off early in Case 1 and Case 2. This also can be invested. I will leave discussion of that for a future article.
In the meantime, what should one do? An option is to split the difference with extra money that you get. For instance, if you have an extra $50 per month then send $25 to the mortgage and $25 for investing. In this way you get to pay off the mortgage early and also accumulate a nest egg over time.
Coronavirus Dividend Cuts and Suspensions List in 2020
I updated my coronavirus dividend cuts and suspensions list this past Wednesday. The number of companies on the list has risen to 302. This is a fairly significant threshold as we are now over 10% of companies that pay dividends having cut or suspended them since the start of the COVID-19 pandemic. Six companies were added to the list this past week. This past week I added Armanino Foods of Distinction (AMNF), Host Hotels & Resorts (HST), Saga Communications (SGA), Kite Realty Group Trust (KRG), Ventas (VTR), and CoreCivic (CXW).
I will have an article out on Ventas Inc (VTR) dividend cut on Monday. Ventas was a stock that many who invest in real estate investment trusts or ‘REITs’ thought was a SWAN stock. SWAN means ‘sleep well at night’. Ventas owns over 1,200 properties in the senior housing, medical office, hospital, life science, and skilled nursing/post-acute care categories. Besides the U.S. the REIT also owns properties in Canada and the U.K. The REIT is facing pressures resulting from COVID-19. Occupancy in its senior housing properties is declining and costs are trending higher. Ventas derives a little over half its operating income from this category of properties. This pressure led to a 43% dividend cut. Check my blog on Monday for my article on Ventas.
Stock Market Volatility – CBOE VIX
The CBOE VIX remained elevated this past week. It ended the week at about 35, which is about the same as last week. Recall that the long-term average is 19 to 20. Clearly, the surge in infections across much of the southern U.S. and west coast is keeping the VIX elevated in my opinion. Florida, Texas, and Arizona and a few other states are setting daily state records for new infections. In fact, Florida had nearly 10,000 new infections yesterday alone. The 7-day moving average for infections is trending up in many of these states. Some have attributed this to more testing, which may partly be the case. But the main problem is the percentage of those testing positive is also going up.
Why am I talking about COVID-19 in relation to the VIX? Well, more infections are leading to slowdowns in business reopenings and in some cases rollbacks are occurring. This seems to be tied to keeping the VIX elevated at this juncture. Disney (DIS) recently announced that it would delay reopening of Disneyland in California. The company is also delaying the release of ‘Mulan’ since many movie theaters are closed or operating at very reduced capacity. Further, Texas and Florida announced that bars would be closed. On the other hand, in New York positive infections rates seem to have dropped to ~1% and the state is slowly reopening. Ideally, new infections and the infection rate should be heading downward and remain there to get the U.S. economy going again.
In any case, the surging COVID-19 infections has arguably led to more volatility in the stock market. This volatility has benefited certain types of investors, e.g. traders. But I am not one of those. I am a dividend growth investor and looking at the long-term.
Fear & Greed Index – Pay Mortgage Off Early, Or Not?
I have also been tracking the Fear & Greed Index. The current reading is now at 45, which is Neutral. The index is trending down from a recent peak at over 60 a few weeks ago and heading back to Fear. The S&P 500 is trading at a price-to-earnings ratio of 21.6X and the Schiller P/E Ratio is at about 28.2X. These have come down since last week. But as I stated neither values indicate an undervalued market. Instead, the market is fairly value at best and is arguably overvalued. I am not putting new money to work at the moment. Most of the stocks that I want to buy had a pretty good run in the second quarter and are at elevated valuations. Stocks I don’t want to buy are currently facing significant challenges to their business resulting from COVID-19. Overall, I am in a wait and see mode right now due to the uncertainty in the U.S. economy and poor response to COVID-19 in some states.
Secret Dividend Millionaires – Phyllis Stone
In this installment of Secret Dividend Millionaires, I want to talk about Phyllis Stone. Phyllis Stone died at the age of 91 in 2013. She left most of her $6 million in wealth to charities. She left the same amount of $885,642.89 to the Children’s Hospital at Albany Medical Center, Salvation Army, American Red Cross and the United Way of the Greater Capital Region. She also left money to American Heart Association, American Lung Association and Capital City Rescue Mission, which each received $250,000.
Phyllis Stone worked first in pharmaceutical laboratory in the 1950s. She then worked in the real estate division of Mobil Oil Corp in the Albany, NY for more than 30 years. Mobil eventually merged with Exxon and the new company was renamed ExxonMobil (XOM) in the late-1990s.
How did Phyllis Stone become wealthy? Reportedly, Phyllis bought Mobil stock many years ago. This stock grew through splits and dividend reinvestment to tens of thousands of shares of ExxonMobil. She also owned other stocks and bonds as well as her home. But the bulk of her wealth was in ExxonMobil stock. This was to her advantage has ExxonMobil has been a wealth compounder over time. The stock is also a Dividend Aristocrat.
Phyllis Stone exhibited characteristics consistent with many other Secret Dividend Millionaires. She bought stock early in a growing company. She lived simply and led a relatively fugal life. For instance, she drove the same car for many years and lived in the same 2-bedroom house for many years. Notably, Phyllis was seemingly not as eccentric as other Secret Dividend Millionaires. She reportedly had a circle of friends, a box at Saratoga Racecourse, and knew the Grateful Dead personally. Phyllis also let time be her ally and leveraged the power of compounding, which is a powerful lesson for those trying to build wealth. In the end, Phyllis Stone became a Secret Dividend Millionaire.
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.