WANT A CONSERVATIVE strategy that can help you prepare for college costs? Consider prepaying your mortgage.
In 1992, when my oldest was 10 years old, we moved to a new home. We opted for a 15-year mortgage at 7.625% with 33% down. With our son’s graduation set for 2000, we began to prepay the mortgage so the last payment would coincide with the month before he began his freshman year. Thereafter, the payments previously sent to the mortgage company were instead directed to the college.
Our aggressive repayment plan was made possible by buying enough house for our needs but less than we could afford. On top of that, the large down payment ensured that the required monthly payments were relatively low.
Financial planners might say a better strategy would be to take out a 30-year mortgage with, say, a 10% down payment and then pay only the minimum required. The notion: You could take the money that isn’t going to the mortgage company—the difference between the 30-year loan’s smaller down payment plus lower monthly payments and the 15-year mortgage’s larger down payment and higher monthly payments—and instead invest in the stock market.
As it turns out, I was able to make a direct comparison of the two approaches. We had money provided by a grandparent for our son’s college, which was invested in a stock mutual fund. For most of the 1990s, it looked like a great strategy. Then the dot-com bubble burst and a big chunk of the fund gains were erased just as college was starting. Meanwhile, the money prepaid on the mortgage effectively earned 7.625% a year. What are the lessons here?