I'm sure you're right, but I'm just not understanding what you're saying.
I just needed to repeat that. Wish I could hear it around my house more often, lol!
Brad: I am mixing a couple of things together in that post. I should have gone back and clarified when I realized I'd done it, but ... I forgot.
Yes, you are correct that if the choices are: (1) deposit money in a high-interest savings account and (2) prepay mortgage, the way you've structured the problem has the first option win (presumably because of compounding; I didn't actually run the numbers).
The reason I say the mortgage pre-payment wins relates to the time value of money. Here's why: when you let the $20K sit in the high-interest savings account, over a 20-year period at 3% you will have the gain you've set out. But that ignores the time value of money - you need to discount the interest you will receive in future years, because it has less value than a dollar received today. Depending on the discount rate you use, the value of that (future) stream of income can be quite low.
However, in the mortgage prepayment example, you actually "gain" the shortened mortgage/lessened interest payments right away. They are no longer owed on your mortgage. There's no TVM discounting required...you don't have to "wait" for the return. Right?
So given that option (2) gives you the gain at the moment you make the prepayment, what you are comparing is the present value of the foregone interest payments (i.e., the value you have gained by no longer being required to make those interest payments) and the PV of the stream of income received over 20 years (in the example I originally used).
Put another way, you could structure the problem to answer the question, what is the internal rate of return I would need to earn on my $20,000 of available cash to "beat" the NPV of paying down my mortgage by $20,000 today?
If I have time tonight I will run both calculations. I know that in the second case, the answer will be more than 3%. That's what I was alluding to when I said the available return is "more than 3%" - but I didn't provide the rationale.
Finally, the IRR on the mortgage prepayment is "guaranteed" in the sense that it is available now and not conditional on other outcomes or factors. So ideally you would compare the IRR on the mortgage prepayment to another guaranteed investment.