I am facing a dilemma.
I have 82k in cash and I have an 82k remaining mortgage to pay off. I can either continue the mortgage and invest my 82k cash into an investment vehicle (FD/CD) @ 7%, or just use my 82k cash to pay off my 82k remaining mortgage completely and end it.
My monthly installment for the mortgage is $905 which is made up of $710 going towards capital reduction and $195 going towards interest for the loan.
I am very confused because both my calculations end up in two different conclusions:
- A: Since 7% of 82k = $5740, my yearly income would be $5740 if I
continued paying $905 per month and invested the 82k. Also, My yearly expense would be $905 x 12 = $10,860 due to installment payments. So, on net, my yearly cashflow = $5740 - $10,860 = -$5120, compared to 0 if I paid off my mortgage right now. Clearly, paying up lump sum is better.
- B: Another way to look at it. My interest that I would get from the investment vehicle is 7%. The mortgage interest to the bank is 2.84%, which I calculated approximately as (($195x12)/82k)x100, which represents the annual interest portion of my installment payments as a percentage of mortgage remaining. Hence, clearly, continuing the loan while investing the 82k @ 7% is better (7% > 2.84%).
- C: ? Are there any other ways of looking at this situation?
Could anyone shed some light on this? Am I calculating anything wrong? I would appreciate any help greatly.