(If you did not read Part 1, please go back and read it as that is the basis for this post.)

In the last post, we left John without a job the couple was forced to sell their home at a loss to avoid foreclosure.  We also mentioned how they regretted their decision.

So, with continued analysis, let's first look at how they could have done better even with a 15-year mortgage and we will assume the couple has no financial difficulties.  John and Jane made a decent amount of money and found themselves in the 31% tax bracket and stated they planned to retire in 30 years.  What would happen if they invested their tax savings for the next 29 years?  What if they invested their $2,499 tax deduction in the second year for the next 28 years?

Remember, the money you give to the government means you no longer have it, which is a 100% loss.  If you save that money from a legitimate tax deduction, such as mortgage interest, you now have that money to invest and grow compounding every year.

So, if John and Jane invested their tax savings throughout the entire 15 years, then they continued to let the same money grow (no additional contributions) for the next 15 years (30 years total), they would have $199,082 extra available for retirement.  If they decided to invest in the stock market instead, that amount could be significantly higher.  Since John and Jane only had a small mortgage of $100,000 for this example, you can see that those who have larger mortgages would have a much more dramatic amount.

So, did they make the right decision if they took the 15-year mortgage and invested the tax savings?

To answer that question, we must dig deeper into our analysis.  Let's assume they decided against the 15-year mortgage and opted for the 30-year mortgage instead.  We will assume they did the same strategy as above and invested only the tax savings for now.

The value of their tax deduction in the first year would be $2,626 and by year 12, they would still be receiving a tax deduction valued at $2,265, where as the 15-year mortgage tax deduction value is only $949.  So you can clearly see there is much more tax savings available to invest by using the 30-year mortgage.  Why not invest them where they can grow every year?

So let's compare the investments after 30 years again.  With the 15-year mortgage, we stated their investments would grow conservatively to $199,082.  However by taking the 30-year mortgage and investing the tax savings like you did with the 15-year mortgage, the 30-year mortgage provides investments totaling more than $308,000, over $108,000 more!!!

Keep in mind that this is for a $100,000 mortgage and is even more dramatic if you have a larger mortgage.  What is even more dramatic is for those with discretionary income that try to pay off their mortgage faster.  If they diverted the money into their investments instead, they would have an even greater amount of money for retirement or other things.  You can even take this to a new level by utilizing an interest-only loan and investing the difference. 

The bottom line is that Americans that go about paying off their mortgage as quick as possible are ultimately costing themselves more money in the long run.  You may get a house paid off faster, but you will sacrifice overall wealth to do so.