TAX deductible interest. It's a great consideration that we are having here in the comment section. But since 2017, your mortgage interest may not really be helping your taxes! Learn more in the latest video: ruclips.net/video/5WaeQsid6yY/видео.html
Your calculations on the investment income are wrong. Your investments get reduced every year with taxes. That money won't be available for reinvestment.
@@sblijheid in the case of taxes on investments, if you have this in a taxable brokerage account, but you only get taxed on (1) capital gains if you sell or (2) dividends. The growth is not taxed until sold.
Congratulations! You USA residents are very lucky and fortunate to get a tax deduction on your home mortgage and student debt!!! In Australia, loan interest can only be claimed as a tax deduction against INVESTMENTS. Since a family home is for personal use, any debt incurred is not tax deductible. We have to pay off the interest and debt AFTER income tax. That said, there is NO capital gains tax when we sell our family home.
@@malkov0001 While this used to be a thing - it's much less than it used to be unless you're paying over like $30K/year in interest... much below that and the "standard deduction" out weights the benefit of itemizing (i.e. taking a tax deduction on home interest).
Great video. Would you mind expanding on why you’re using the inflation adjusted return rate? Seems to me a better apples to apples comparison would be to leave it in, why remove it?
We lived frugally and paid off our mortgage 22 years early. Best thing we ever did. Expanded our business, retired early. Saving and investing. Seeing our grandkids. Volunteering at church. Peace of mind.
Not possible to do by just living frugally you also had to have a low mortgage PMT vs Income and low tax, maintenance & insurance on the home. Probably a favorable LTV too.
Congrats. I paid mine off in August as well. Now I'm all in on investing too! Most of the stocks are down that I would have bought so it's a double win 😅
Some issues that undermine this analysis: First, the TLDR version: 1. Don't adjust your projected rate of return from your investments to reflect inflation unless you also apply the same inflation assumptions to your mortgage rate. 2. The results of your analysis are sound with the mortgage rate and investment rate of return assumptions you used, but a lower mortgage rate or higher investment rate of return would lead to very different results. 3. Being mortgage-free early is valuable, but it's also valuable to have investments that could be turned into cash in a pinch without taking on new debt. 4. You didn't cover the tax implications - the tax hit on investments, or the tax deduction for mortgage interest (although the second is covered in a follow-up video). Now the long version: 1. You took the investment return from 10% to 7% to reflect the effect of inflation. It is very important to understand the effect of inflation on your investments. In 2053, you may look at your portfolio value in dollar terms and have made 10%, but if inflation averaged 3% over that time, your return in terms of purchasing power was more like 7%. This is what you were trying to capture by reducing the presumed rate of return from 10% to 7%. However, you did not make a similar adjustment to the cost of your mortgage payment. You take out your mortgage in 2023 dollars. But you get to pay it off, not with 2023 dollars, but with 2024 dollars, and 2025 dollars... and eventually 2053 dollars. Those future dollars will probably have a lower value than 2023 dollars. Inflation eats away at the value of your mortgage just as much as the value of your investments. So if you have a mortgage rate of 7% but inflation is 3%, your effective "real" mortgage rate is actually just 4%. In dollar terms you're paying 7%, but the net effect on the purchasing power of your net worth is 4%. By applying an inflation adjustment to your investment return but not your mortgage rate, you're not actually comparing apples and oranges. In fact, for those who have a low mortgage rate (some people have a rate below 3%), if you assume inflation of 3%, their "real" mortgage rate after inflation may actually be negative, since inflation is eating away at the value of their mortgage faster than the interest builds up! 2. You assumed a mortgage rate of just over 7% - greater than your assumed investment rate of return. This is what drives your results: your mortgage rate is greater than your assumed rate of return. But for those who have a much lower mortgage rate, this analysis will get very different results. For those who got in when the mortgage rate was 2.5%, 3%, 3.5%, if you can invest at 7%, you're absolutely better off doing that than saving 3.5% or less. 3. You talked about the freedom of being mortgage-free, and this does have value. You addressed the alternative of using investments to pay it off early - and the risk of a market downturn right when you want the cash. Those were all good points. But there's another point to be considered: when you make a payment on your mortgage, that cash is no longer available to you. In terms of your net value, it's reducing your debt, which is good. But in terms of having cash on hand to cover an unexpected expense, it's gone. Investments, on the other hand, can, if necessary, be turned into cash to cover an unexpected expense; if that happens during a market downturn it's going to hurt, but you still have the option to do it instead of taking on new debt. If you pay off your mortgage but don't have much cash on hand, any unexpected expense will be painful and could force you to take out new debt. If you have investments and you have an unexpected expense, you could sell your investments. Of course, a good emergency fund will reduce this risk. But if your emergency fund gets overwhelmed, having assets you can turn into cash is good. 4. Taxes. This can cut both ways. If you do not invest in a tax-advantaged account, taxes will reduce your rate of return. A 7% rate of return might look more like 5% after taxes, depending on your tax bracket. So the nominal rate of return you make will probably be cut down somewhat by taxes. On the other hand, mortgage interest is tax deductible. If you pay off your mortgage early, you cut your mortgage interest payment faster, which means you reduce your tax deduction - and therefore increase your tax liability. Paying only the minimum mortgage payment, on the other hand, will keep that mortgage interest payment and the resulting tax deduction higher. But - many people will be taking the standard deduction, so this won't help them at all. These two effects can offset each other. The followup video linked in the pinned comment gives a good explanation on how the mortgage deduction may not help you. But if it does, this can also help tip the scales one way or the other. One further note: You know exactly what your mortgage interest rate is. If your mortgage rate is 7%, every extra dollar you pay on your mortgage will save you $0.07 per year. Your rate of return on investments, on the other hand, can be variable, depending on what investments you make. (fixed-rate bonds are predictable, but give a lower rate of return.) The S&P 500 has historically averaged 10% in the long run, but there's no guarantee this will continue into the future. If your mortgage rate is 7% and your investments make 5%, you would be better off paying off your mortgage. If your investments make 20%, you should be investing (but good luck maintaining a 20% rate of return over the long run). In the long run, 10% (before taxes) is probably a reasonable prediction, but it's not guaranteed.
At 25 my wife and I had a stack of cash from working and saving diligently. Put 43% down on a cheaper home in a low cost of living area. About six months later we received a letter from our mortgage holder which showed how much we paid in interest vs principal. I was so upset at the difference that my wife and I walked into the credit union the very next day and paid our mortgage off. I wasn't about to get scammed. Fast-forward six years and we're happy to be mortgage free and chose not to upsize our modest home. Sometimes I wish I invested the money instead, but having no home payment allowed us to both change industries and completely change our life (soo much better work-life balance!). I'm a proponent of paying off mortgages early, because of the freedom it provides! I don't care if you have a 2% interest rate, I'd rather not be forced to work for that payment any longer than needed :)
I’m two weeks away from paying off my second home at 2.75%. With both houses payed off I’m going full stern towards future investing!! It feels great to be mortgage free at 39!!
@@SaloneSaturday that is the problem people just let their emotions run their lives, rather than make a good decision based on the financials. He even loses the interest right off.
Math is fun. Bottom line: Paying off my mortgage gave me peace of mind which I find absolutely priceless! I followed Dave Ramsey's advice, walked through the baby steps, read Total Money Makeover and went through Financial Peace University. Wasn't easy, but TOTALLY worth it. Cheers!
I paid off my $187,000 mortgage in 3 years and 3 months. I was investing 15% of my income into retirement but stopped all investing for the last 8 months as I was getting closer to paying it off and I set a goal to pay it off by my 37th birthday. I ended up beating that goal by 3 weeks. I have literally zero debt now. Words can't describe the feeling of peace you get when your house is paid off and you have no debt whatsoever. Now I'm dumping a ton of money into retirement and purchasing several items I was holding off to buy until the house was paid off. I have a couple pretty cool vacations planned for this year too. I will add that I have been a Dave Ramsey listener for many years and his show was a huge motivator for me. Life is great!!
That's impressive! I'm a couple years older and still have a good while on my mortgage and some car debt. Both low interest at least. But I'm only doing about 9% investments and 7% into an HSA monthly. Match, HSA then Roth with what's left.
Its a long debated argument but ultimately paying off your mortgage holds much more fringe benefits psychology. Ive done both and once i paid off the mortgage my whole attitude towards work and life in general changed for the better and savig and investing grew expediency due to this change in mind set. You can be bolder and more aggressive once you know your home is yours and it encourages you to grow more like you probably wouldn't when you have a mortgage hanging over you.Great video.
Not really yours though… Our property taxes and insurance climb at an amazing rate so that when we pay off our house 3 years from now we will be paying around 60 percent of what our mortgage was. Not that exciting to pay off the mortgage when this is the case.
@shiscarp That is impossible? Besides, if you rent, you are paying property taxes in the rent money you pay? If you look at it like that, then you never own your car either? Because you pay road tax?
You can, if you had mortgage at say 2.5%, you pretty much lost thousands in gains over the loan period by paying it off early. That's your price for "peace of mind".
We paid off our mortgage on August 14th and for me the biggest thing is the freedom. Now we can invest and grow right before retirement or at least that’s the plan. 😊
Paying down your mortgage does not equate to freedom. You still on a hook for other expenses. Like property tax, bills, insurance, repairs, etc. Freedom is having your investments pay your expanses. Not having mortgage is great, sure, but equating this fact alone to financial freedom is a mistake.
@@geeeee8268 You are absolutely correct. However, there is freedom from the pressure of the mortgage but not total financial freedom until passive income can pay your bills. That is the distinction.
You have taxes with everything. Property taxes are never going away. However, all the fees and taxes associated with license plates doesn't stop me from paying off my car. So why wouldn't I want to own an appreciating property outright?!
The other thing to consider is that when you get close to paying off the house, most people paid off even quicker. Not only do you have more money to invest, but you have more money for savings which gives you a more secure future. It’s way better to pay off the house then to invest.
No, it isn't... at least if you locked in a low interest rate on the mortgage. If it's costing you 3% to keep the mortgage, and you are making 10% in the stock market, then that's 7% profit you're keeping.
@@Psuedo-Nim Your logic dose not follow. The same time passes either way, the only question is, after a set amount of time has passed, under which condition do you end up with more money.
Paying off my mortgage gave me an ease of mind, which is priceless. Not paying off my mortgage feels like I am borrowing money (paying interest), hoping I have a positive return in addition to my interest rate.
The issue is most wealth for average people is in their home. If you pay off your loan you lose a easy way to leverage a lot of debt. Though the risk is lower it’s still risk
Many folks have interests rates sub 4% (2.9, 3.1, etc.). I suspect if you ran your calculations with one of these mortgage rates it would show a different story. It might we worth doing a follow up video and showing the math based on various mortgage rates, so that folks could see at what point it is better to payoff vs invest.
3,5 here and peace of mind being mortgage free is way more valuable to me. Plenty of time to invest after hopefully. Plus my 401k is still working. It’s just such a personal choice with no right answer
If you’re below 11% it makes sense to invest in the stock market. This guy chose a lower rate of return in the stock market than his interest rate. The stock market does not match his assumptions.
Interesting way to calculate between the two. For us we paid off our mortgage early and took us 8 years of living below our means and putting all yearly bonuses and everything at our mortgage. At age 38 I became mortgage free. Since then I have been maxing out my 401k and Roth IRA and having 0 debt of any kind we built up a 2 year emergency fund in case we lose our job. So glad we did it because peace of mind definitely beats everything as we feel semi retired and no more anxiety of losing our jobs! Also time is the most important to us, instead of 25 years later to be in this situation, we can enjoy it now! It also allows us to save 35-40% of our income and with two kids and funding their 529s it is an incredible feeling!
If you had put some of that money into max'ing out your 401K, HSA, and Roth IRA instead, you would have enjoyed 8 years of tax-free gains during one of the biggest bull runs in financial history.
@@DimaUkraineYT - Let's say you owe $200K on your mortgage at 5%. That's about $1100 per month. If you had the $200K in your 401K, and the market went down 25%, you now lost $50K. If you lost your job, you now have to pay your mortgage, and your likely dipping into savings or your 401K. Yes, this is a worst case scenario, but it happens. Not paying off your mortgage is basically leveraging your investment. I'd rather payoff my necessities like a home, then invest.
@@JohnBowl14690 This is obviously a very personal decision for everyone, but not all leverage is the same. The leverage you get with a mortgage is typically the best you can possibly especially if it's at a lower rate than inflation, and it's backed by an appreciating asset. If you got a mortgage for below the inflaiton rate you essentially got free money from the bank. Any cash you have, you can park in a high-yield, FDIC insured savings account that in essence PAYS YOU for not paying off your mortgage. Leverage is a powerful tool that even the most successful, cash-rich companies like Apple and Microsoft use to their benefit. That's the interest side of things, that doesn't even get into the tax benefits you get from holding a mortgage. Paying off a low interest mortgage in this environment is terrible financial advice.
@@SRD1281that's too logical and not emotional, this won't work on RUclips. Just look at the calculations done at 7.18% interest and pay of mortgage that's at 2.75%. 😂
The peace of mind, the ability to live on a single income if needed, the ability to say FU to an ahole employer etc etc biggest game changer, sure investing should be the next step but paying off the mortgage is step one on unlocking the cheat code of life!
I had been weighing the worthiness of paying off my mortgage (around 15+ years left @ 3.875%). If I sell off a majority of my stock portfolio, I could pay off my mortgage loan. However, considering that the monthly mortgage payment consists of (principal)+(interest)+(RE tax)+(home insurance), paying off the loan only relieves me of the mortgage principal and interest portions which is only about half of this monthly expense. I live in a high tax state. Thus, in return for cutting out only about $1K from my monthly expenses, I would lose the majority of my liquid net worth safety cushion along with the dividend income it was generating. I could only conclude paying off my mortgage is not worth the risk.
Another option would be to take out a loan against your liquid assets to pay of your home. Essentially doing a refinance but for a much shorter term. You could possibly save on interest as the loan is fully backed. It’s how most Rick people deploy cash because it’s cheaper to pay say 1-10% interest vs paying capital gains.
But youre automatically gaining that wealth back in your home value. Whatever your home is worth would be your new net worth. And then youre free of debt and free to invest more aggressively.
@@rsjcmp2285 Or you could pay off your home thus making it a hard asset that you own and saving untold thousands in decades of interest payments, then invest twice as much for all those years you would have still been paying off the mortgage.
Finally, a financial content creator that I agree with, besides Dave Ramsey, that says it is better to pay off your mortgage than invest the money. I am making crazy extra principal payments (I made 5 principal payments for September), and I am scheduled to pay my mortgage off in 4 years.....cutting 17 years off my 30 year loan by paying it off in 13 years. I started off slow in the first few years, but then my pay started growing, and now it is like a game to throw as much money I can at the mortgage and watch the balance go down. My goal is payoff before my 59th birthday. Great content....you got my sub.
@@viatori5566 Is borrowing your parent's car to get to work as a high school student foolish? You are indebted to return the car to your parents but that car helps you earn money. That's a very simple example but the point is that debt CAN be used to generate more income and wealth than would be possible without taking a debt - it's all about whether that debt is used wisely.
@liquidmetal7875 that example isn't even in the realm of similar to loans. No. If you don't have money Hou can afford to lose on a business or house or student loans, you certainly can't afford to lose the banks money.
@viatori5566. It was a very simple example. If you borrow something you owe it back but you then have that something to offset you owing it back. If those resources allow you to gain more than the “interest” charged then you receive a net benefit. E.g. If a student on track to be a doctor takes out 400k in loans it’s no problem when they can earn 500k-900k or more each year - something they likely couldn’t do without incurring debt. They will likely earn more over their lifetime than someone who avoided going to med school due to not taking on student loans.
@@viatori5566 That example is great, you simply fail to understand. Investing money isn't losing it, yes there is risk, but paying off your house is just another form of investment and just as markets can crash, housing markets also crash. Smart choice is to invest into whatever will yield highest returns while keeping risks minimal.
I like the idea of doing a little of both. Either $100 each into investments and mortgage payoff, or maybe do some market timing. For instance, if the stock market has been running really hot, do $200 on the mortgage, if it's been dipping, buy the dip with the full $200. You won't always get it right, but it's kind of scratching both itches at the same time.
One thing you didn’t take into account was after you paid off the mortgage early, what happened to the extra $200 monthly? If you also invest that then the monthly investment amount goes to $2,432. Which makes your investment returns much more than if you didn’t pay off the mortgage.
Also neglected to factor in that when you pay off your house, only the P&I component is freed up. You’ll still be on the hook for taxes and insurance that are no longer being held in escrow. When the mortgage is paid off, you wouldn’t be able to dedicate the full (former) mortgage payment to investing.
One thing to mention - many people have mortgage rates less than 3% - at that rate, it almost always makes sense to invest instead of paying off the mortgage.
The largest advantage is not having to pay the mortgage. In our case that is 36,000 a year savings. Times ten years that is 360,000. And the next advantage is the weight off your shoulders. The third is never having to pay that interest ever again. We have now not paid a Mortgage payment in 11 years. The running joke i say to my wife every month , " its time to pay the mortgage and car payments" She says back to me " we already paid off all those bills" I say " Oh yeah i forgot"
We paid off our home, first order of business. Even if dollar-wise it was half the return of investing, there is no security quite as reassuring as owning your home.
This only makes sense if your interest rate and rate of return are similar. If you locked in a 3% mortgage like many did during the pandemic it makes no sense to pay off early and invest extra money you have for 30 years instead
Do some of both. As you get raises and/or continue to work on trimming your budget, you can continue to increase the percentage that you invest and the amount extra that you pay extra on your mortgage. That way your eggs are not all in one basket and you are making gains in both areas.
How are you going to factor in inflation for the stock investment, but not the mortgage? Inflation is good if you owe money, bad if money is owed to you. Your calculations were nulled once you made that critical error. The only way paying your mortgage off early is better than investing will be if your interest rate is higher than your ROI, plain and simple. You can make anything look good if you skew the math.
Sure enough, I came to be 58 year old and got the axe (for being at a high pay grade). Luckily, I had paid off my mortgage the year before. And so, I retired comfortably at 58 and lived happily ever after (well, so far). With all my free time, I watched RUclips videos on how to invest, and the result has been a doubling of my retirement funds over the last three years. This would not have happened if a mortgage millstone was still hanging around my neck. Now I'm collecting Social Security and have not even started to take distributions from my retirement funds. Let em grow, I say!
One thing to keep in mind is that a person who choose to invest in stocks can also pull from their investments in bad times like a layoff. To do the same with the house you'll want to open a HELOC. However, a HELOC is a loan. That said, if I had a 7% rate on my mortgage I'd want to pay it off early since it's guaranteed money. Today a huge amount of people have a 2%-4% mortgage.
exactly; I can get higher % interest returns from a high yield savings account than my mortgage interest rate. my ROI from investments this year is more than 3.5X my mortgage interest rate, and this isn't what I'd call a great year in the market.
Not exactly. A high yield savings account is simple intererst -- a Mortgage is amortized so the rates are not comparable. Also ROI from investments must account for taxes on the gains, 15% on long term capital gains. Just FYI @@zoomzoom3950
@@TexicanMrYou only pay taxes on gains, and only after you withdraw. There's low free brokerages out there. Plus, you shouldn't be withdrawing a lot all at once...
I'm planning more next year of putting a little less in my investments and focusing more on paying off my student loans. I know I won't be able to pay off the full 25 grand left with what I make, but I really want to make a better dent in it before the interest completely barriers me. I have made a lot of progress, since I never stopped paying during the pandemic, just smaller amounts, I've already paid off 1 of my 6 loans, and around 1,700 away from another one being done! I don't care if paying them off might lower my credit score, I want to be done with them by around 35.
With a 7% mortgage it is a no brainer for making extra payments (or paying it off early)....even use velocity banking (chunking with balance transfer offers usually 3-4% fee + 0% for x months).....for a mortgage under 3%, it's a personal choice (in my opinion)
It's a pretty complex calculation as you have to consider your interest rate, market conditions and tax impact. If your interest is 7+ percent and you can swing the extra money it's a no brainer, however if your rate is 3% you can make risk free interest at 5+ percent then you may need to think heavy on it.
SP500 had low growth for more than a decade, from 2000 to 2012 it went up and down oscillating between 756$ and 1400$. In those 12 years, performance was not as good as between 2012 and 2024. In fact, those two decades roughly were drastically different in yields. My point is - it all depends on when you get in and when you get out. Repaying your mortgage is a sure win because it is predictable. SP500, it may go up 3x in 7 years, it may go down 15% in 3 years just at the time you are retiring. The whole "average" term is misleading, it doesn't mean that the "average" is constant smooth curve.
If you don't own your home outright and haven't paid all your debts, then you do not have money to invest. Investing in the stock market and purchasing assets is basically gambling no matter what you may call it. Playing with numbers maybe fun but it's easy to fool yourself into investing money you need to keep a roof over your family's head. Pay off all your debts. Buy the best health insurance you can afford. Save for emergencies. Then start investing with money you can afford to lose. If you have a matching retirement plan at work that is another issue. Some companies allow you to choose investments and some limit where the money goes. Do your research to balance the choices and keep an eye on the quarterly reports. Don't forget that someday you will have to pay income tax on this retirement money.
This is a great analysis. In a time where the trend is to tell people to rent where they live and invest everything else, you do a really god job at explaining the opportunity costs associated with not being mortgage or rent free !
For every dollar you put into a mortgage, you have to earn $1.40 (because of taxes). Now look at the reverse, the dollar you don’t have to spend on mortgage interest (by paying off a mortgage early) is worth another 40% to you. You can’t be taxed on money you didn’t have to spend on mortgage interest because you paid a mortgage off early. Between that benefit and having greater freedom with life choices, get that debt paid off as early as you can.
Im 52 and house is paid off. I'd rather have a paid off house than anything (besides good health) i think its a personal thing and it's about how someone approaches life. Im single so no second income to fall back on, so it is important to me to eliminate or to never saddle myself with debt. Ive always been the type to figure the worst outcomes and living waiting for the other shoe to drop. A nice way to ride out a economic downturn or job loss would be in a paid off house. I was homeless once for about 4 years a long time ago and i think that gave me a permanent fear of being homeless as well
Great explanation of the the different angles to look at this but taxes play much too big of a role to only be introduced at the 11:30 mark. Combined state and federal income tax burden is often 30 to 40%. So right in the first comparison the $121,000 saved in interest shouldn't be compared to $161,000 in investment growth. You need to subtract income taxes from the investments
If you should pay off your mortgage early entirely depends on the interest rate you have. If you have a 3% rate, ride that to year 30. If you have 7% like in this example, just pay it off, the potential gain from investing is not worth the risk compared to the guaranteed savings.
The freedom and confidence gained by not having a mortgage can also increase your income. You'll be better at negotiating and creating additional income streams when you're not desperate to make payments.
What is the biggest/most valuable asset?..................... Time....... why spend the most valuable asset of 20-25 years of time to pay off your mortgage?............. Pay off your mortgage as quickly as possible and then you have the most important asset by 20 years.................................................. Time is better then money in the bank every time.
We paid off our mortgage in June. Give me the freedom to be mortgage free any day. Being in my early 50's I still have time to invest more now before retirement. It's a great situation to be in for sure.
This was great. Thanks for making this! I was toying with the idea of building a calculator app that would help with solving this exact comparison. I liked all the numbers you used for your scenario. It played out more or less how I expected ( I was actually surprised that investing the 200$ would in theory beat out paying off the mortgage by an extra 200 in the first scenario even when mortgage rates are at 7%). I liked the amortization schedule you showed. Something else to factor in on the side for why you might want to pay off a mortgage early is to factor in bringing your total equity up in order to not have to pay for things such as PMI, as well as the ability to take out loans against the equity in your home, depending on the interest rates. I've been paying a bit extra each month, and thought it was a little silly as it isn't the mathematically most optimal, but after looking at this schedule, and how sideways the market has been the last couple years, I think it will probably all even out in the end.
Point of order. Given amortization, the "rate of return" on your extra mortgage payments is much less than the mortgage rate, as the majority of the interest is paid in the first half of the term.
Given 65% of homeowners are paying less than 4%, and 24% of home owners are paying less than 3%, it would be better suited for Americans to see those comparisons versus 7.18% interest rates, unless your motive is to justify paying off your mortgage early versus saving for retirement
its really about equal a few grand difference is nothing over 30 years. but its interesting because I watched a video like this before interest rates skyrocketed, it wasn't even close and investing destroyed the extra mortgage payment. very interesting
You included appreciation of your investments but not the appreciation of your house. A true comparison should be the combined return rates of both combined with each strategy.
It makes no sense in your calculation to adjust the estimated S&P 500 returns to account for inflation the way you did since you are not accounting for the impact of inflation on the price of your home or the true cost of each monthly payment. You should use nominal dollars for this calculation. The annualized nominal return of the S&P 500 is likely to be 10% over the next 30 years even if inflation is eroding purchasing power. If there was 10% inflation for several years and the S&P 500 appreciated at a 17% rate (7% real rate plus 10% inflation), the value of your stock portfolio would be increased by inflation even though the purchasing power only increased by 7% annually - you could sell some of that portfolio to pay off your 7% mortgage early and come out way ahead of where you would be if you overpaid your fixed-interest-rate mortgage each month.
Agree. Great point! 10% average return is just that, 10%! Inflation should not decrease the value of the portfolio. Not to mention it is more likely to average a 10% return over a 30 year period than a 7 year period.
All very fair points from both of you. I should've just stuck with 10% - you'd be surprised the people who get fussy about inflation and how it should be 7% and not 10% to account for it...at the end of it all - a smart investor and conservative spender will always be ahead.
@@BobSharpe It might be beneficial for you to see how well stocks did during inflationary periods like we are currently experiencing. I do not know how long the current period of relatively high inflation will last, but it the ownership of real assets are (supposedly) a good hedge against inflation. Real estate is a real asset and shares of stocks represent claims on real assets. If inflation actually helps generate higher nominal stock market returns, it seems as though one would be better off taking one's time paying down a mortgage which has a fixed rate, provided that the fixed rate is below a certain threshold level. Perhaps you could do a video where you calculate what that threshold mortgage rate could be and how to calculate it?
Did he say anything about still paying taxes, insurance and HOA after paying off the mortgage? Because if it ain’t included in those +$2200 left “free” every month… that’s a huge difference maker
Great point, and no that was not included in that $2200. The $2200 is only P&I. Since you have to pay tax and insurance with or without a mortgage, those figures aren't figured into the info in this video.
The interest rate on your mortgage is critical here. My current mortgage rate is 2.15% So I'm heavily investing in the market so that my dividends will pay my mortgage. From a layoff standpoint, I'd rather have money in the market/bank to pay the mortgage for the time I'd be unemployed. It's really about how much liquidity each person feels comfortable with. For the tax side, I use M1 and can take low interest loans against my portfolio if needed, which is tax free.
Risk tolerance is what is forgotten. Lower cost of living from no mortgage gives you more space for a new job, a new business, super saving, a sabbatical, etc.,…
Hey Bob! Just came across your channel today! Really great content and very informative. We definitely agree on paying off the mortgage. As an entrepreneur, I can't wait until I never owe a single penny to anyone again! Congrats on your success and thanks for the great content!
You also have the issue of capital gains taxes. In your example, the guy who invested $200 per month for 30 years is facing a $32,000 capital gains bill. The guy who invested the entire mortgage payment plus $200 for 7 years after paying off the mortgage not only have a larger investment account balance as you indicated, but also a capital gains tax bill of only $10,000. The higher balance combined with the tax savings totals $27,000 more!!!
One other thing not considered is human nature. The person that pays off their mortgage early is unlikely to tap into their equity to make a frivolous or extravagant purchase. To pull money out of that investment, they need to get a home equity loan or similar. People are unlikely to pay off their home loan only to take out a new loan on that property. If you had invested the money instead, especially when invested post-taxes, it is fairly easy to pull money out to take a vacation, buy a car, etc. This happens more often than not.
Paying off your mortgage first is always better. The amortized interest will kill you and your tax deduction is less than what youre paying in interest. A million dollars in interest over the life of the loan could be invested.
Well produced, concise, video.. says it all pretty well. I am one of those who opted to refi to 15 from 30 years, and over 24 years and 3 houses later.. paid off the balance.. have no mortgage anymore for the last 17 years. For me, most of the reason for this was that while you talk about layoffs, I saw that ageism has really hit in such fields as tech, and it was increasingly apparent from the early 2000's that being an older worker, candidate for jobs, etc., was going to catch up with me economically.. if I didn't do something SOON. Good thing I did.. when 2008 hit and jobs were scarce.. I had to live on a meager $17K one year! I shudder to think what might have happened if we had stayed the course these "tik tok investors" have all been pushing of leveraging your mortgage debt to build wealth. I agree with your assertion to pay off the mortgage as soon as practical.. and really ANY kind of loans or debt as immediately as possible. You are indeed better off with all of your money NOT going out to curb debt!
Don’t know if you consider this later in the video, but if you have a lower interest rate than 7.18% then the math doesn’t work out the same and investing instead of paying off the mortgage would probably be more financially advantageous. Yes the rates are 7.18% now, but it’s not unreasonable to assume that people could refinance in a few years to a lower rate. You can also run the risk of foreclosure on a paid off home if you don’t pay property taxes or HOA fees which do go up and can go up dramatically.
Thank you for the video! It’s so nice to see the same minded person! We paid off our mortgage on Oct 2021. It took us 11.5 years to pay it off. In the last 3 years (2019-2021) we lived on rice, beans and veggies (we are vegetarians;) ) During that period of time we also managed to maxed out our 401k contributions. Basically, we were living like students 😅and that was fun!!! Now we are on the Baby Step 7 (according to Dave Ramsey) and we enjoy our freedom 😊
You can play with all the numbers you want, but at the end of the day, if your mortgage balance is 5000 dollars and you somehow become unable to pay, the bank is going to take that house back. It's only really yours once that balance is 0
I paid off mine when I sold a rental property when prices were crazy. House is only 7 years old best part I can say is peace of mind. You don’t fear a job loss as much when you don’t have $1,600 due at the end of the month. But you also have to remind people you still have to pay the property tax.
Pay off early and you also run the risk of defaulting on loan if you don’t have reserve to keep going if you lose job etc So don’t over do the extra payments and save some for future payments
Its excess fear that incents people to pay off mortgage even though the math for most situations will show its best NOT to pay off mortgage, esp people with interest rates around 3%. Sure, if you lost your job youd have risk of foreclosure. But how often does that happen? And there are ways to mitigate that risk. And usually youd just sell if you had to. And in the very rare worse scenario that you are foreclosed on, so what? You will recover pretty quickly.
Really great video. I have tried to get my wife to invest in buying a house when the mortgage rate was really low. We were also investing monthly in the market (not that much but still). It was the right decision because now the mortgage rates have almost tripled!
Great video, I was just talking to someone about this the other day, they were like invest the money instead, obviously you'd also have to pay taxes on that 40k return from your investments. Call me crazy but I'm going with trying to pay mine off. I have 13 yrs until I'm 65 and have 22 years left on my mortgage. If I ever want to retire I need to get rid of my mortgage payment. I owe 158,000 @ 3.75% my payment is $1450 a month, I figure an extra $500 a month should do it. I do have a 401k and a few small investments but I'm pretty illiterate when it comes to investment. I figure my safest bet is try to knuckle down and pay my mortgage off.
Its all about RISK Paying off your mortgage allows you to know two things! 1. When you will be debt free 2. When you can save without debt. When you pay the interest only on a mortgage and invest to hope that after 25 Years you have enough saved to pay off the mortgage in my opinion is high RISK. On paper it sounds great. What could go wrong? Well if we use 2023 as a guide we see that Inflation and Mortgage interest has gone through the roof! That will mean that many will be paying 1000s extra before retirement. When you know the life span of debt and can reduce it why on earth would you gamble a sure thing?
You can go a bit further in this. % yield per dollar actually increases the earlier you are in the mortgage because the interest is spread out in such a way you are paying more interest than principal at the start of the term, and then it decreases the closer you get to the 30 year period. So you should try this again, but pay an extra $200 a month in your mortgage until you have 50% equity in the house and then switch to investing and see what your returns are.
Great video, thank you. But the most important thing is that your home is not an investment. It's your lifeboat, your suit of armour, your immune system. A paid off home allows you to survive job losses, accidents, sickness and bereavement. It gives you resilience to make it through to better times.
Good on you for bringing light to this Bob. Lots of people are pulling risky moves without first covering their principal home residence. Investment debt is good, debt on your principal place of residence is bad risk management. You could end up homeless and this ties down a lot of money into a solid piece of investment. Most people would blow the excess money on crypto, gambling or excessively expensive cars/holidays if they had their mortgage money freed up. That way, when they do blow all their money in the future, they are at least mortgage free and safe.
well said. Also, most people that pay off their mortgage early talk about mental health advantages to having no mortgage. Without a mortgage, your freedom to take greater risk to start your own business or just to retire early can't be calculated as well.
The major flaw in this model is most mortgage payments include escrow payments, which can be 15-40% of your total mortgage payment. Thus, after you finish paying your mortgage, you wouldn't stop paying the escrow(taxes and insurance).
The monthly payment he used in his model was just for the mortgage for the $300k home and the assumed rate. Obviously you still have to pay taxes and insurance after you pay it off. That’s true either way.
Such a common question that comes up and this video effectively illustrates the different options and results for each option. Thank you for sharing 👍👍
You didn't consider that the profit on the money in the stock market would be taxed at capital gains tax. Also, you shouldn't count for inflation, because your. comparison is dollars in the future for dollars in the future. Instead, look at the real returns of S&P 500 index funds, because the S&P500 has churn and the index funds have fees. In addition, the house could appreciate in value. In addition, that 7% may be tax-deductible, in which case the real cash flow impact of the mortgage is lower. (It's complex. I paid off my mortgage early for similar reasons.)
What people do not factor in is that when you pay off your mortgage you don't save the $2000 a month. You still have to pay property taxes and insurance. All you save is the principal and interest.
Nice Analysis. Since the total value is similar (paying off early vs. Investing)- it boils down to peace of mind or personal preference. As I did not want to carry a mortgage into retirement, I did a refi from a 30 yr fixed to a 20 yr fixed before interest rates were jacked up. So, in effect, I am forced to repay early. If rates ever go down again, (or when), I could always refi back to a longer term to reduce my monthly burden.
@BobSharpe. May I add some very important factors 1. You should never gamble with the roof over your head, so if you pay off your mortgage and become disabled or unemployed, you only need to pay maintenance, taxes, and insurance in order to keep your home. Very important 2. In this litigious American society, if you pay off your house on Florida, it is your primary residence, and homesteaded, no debt can take it away except tax certificate.
Debt is Debt period! Best to have none. I always say wouldn't you rather get 5% than pay 5% ? Being debt free is freedom :-) I am 62 and tell younger people that there is a big difference when you go to work because you want to not because you have to. It stinks to work just to pay bills ! When you have no debt and go to work and actually get paid and can keep and invest it life is good :-)
Financial models are pointless for your primary residence. Pay off the mortgage ASAP and stick 3 years of property taxes in an interest bearing account. You don't know what the future holds and the security of knowing no one will take your home is priceless.
I'm in Australia. Any dividends paid or any capital gains made on investments are taxed at your highest marginal rate. For the majority of (not all) Australians, this is 32.5%, which is a heck of a slug. It's a no brainer for the majority of us to pay down our mortgage as quickly as possible. The exception here, however, is that we can use our superannuation portfolios (401k in the states) to reduce tax incidence down to 15%. The downside is that the principal and the earnings withing the superannuation fund cannot be accessed until the age of 60, unless there are extraordinary circumstances.
Bob, good video overall. You made an EXCELLENT point on timescales. Paid off mortgage in 23 years (plus 7 years investing) vs investment for 30 years. A lot of people miss the boat on this one and make the comparison apple-oranges (23 year time scale vs 30 year time scale), so good job. I have a little bone to pick though regarding the assumption of rate of return. By assuming 7% return, effectively assuming inflation will be 3% as you covered in the video, your stock portfolio alternative was using 2023-equivalent-dollars for the final number, resulting in a lower portfolio value that is not comparable. Whereas your additional monthly payment alternative was not accounting for inflation at all so your final number is in 2053 dollars. 2053 dollars are less valuable than 2023 dollars. To simplify: If 10% ROR becomes 7% due to inflation then we also must adjust the mortgage interest rate down by 3% as well from 7% to 4% to make it apples-to-apples. Alternatively, we leave both rates as they are since that is 1 less assumption to make and simplifies the math. Leaving both rates as they are (10% ROR and 7.12% interest): Alt 1: 30 YR, 10%, $200/mo invested = $459,828 portfolio value in 2053 dollars Total loan interest: $427,252 Alt 2: Mortgage Early Payoff (200 extra per month); invest for 7 years after to reach 30 years timescale. 30 YR (paid off in 23yrs ), 7.12%, 300k, extra 200/mo towards mortgage = $2020 + $200 in monthly budget (as covered in the video) 7 YR, 10%, $2220/ mo invested = $271,175 portfolio value in 2053 dollars. Total Loan interest: $307,307. Alt 1 cost more in interest, but in the year 2053 you have 152,522 more dollars than in Alt 2 because Alt 1 essentially outgrew Alt 2. The amount of interest paid is irrelevant since the assets at 2053 = portfolio value in 2053 + house value in 2053. The house value is independent of the mortgage, common to both alternatives, and thusly can be ignored. Obviously, freedom is, well, freeing and that is a good thing. However, if exclusively on the basis of maximizing wealth at a particular future date is the goal, Alt 1 is the better option. Alt 1 is the economic equivalent of having an additional $85,000 dollars today (2% inflation assumption) or $63,000 dollars today (3% inflation assumption), which is 1-2x most Americans median annual salary. Alt 2 is a guaranteed return of ~7% for 23 years which is nothing to scoff at of course. The obvious con to Alt 1 is higher dispersion of results, but there is still wiggle room to come out ahead over Alt 2 even at an average ROR of 7.5%, which would be a HUGE market paradigm shift. As long as average ROR exceeds the cost of debt (interest), the investment will always win out in the long run. PERSONALLY, 10% ROR (ideal) vs ~7% interest is too close for my comfort according to my risk tolerance and the intangible benefits of freedom and certainty. However, if YOU (the reader) has a fixed rate mortgage of less than ~4%, you would be a fool to pay off the mortgage early unless any of the following apply: (A) lack of spending discipline; the money has to be invested, not spent; (B) You HAVE to have the house paid off before a certain date (low retirement savings/annuity is a common reason); (C) your financial anxiety is degrading your mental health and the mortgage is the reason.
Always situational, there is no one correct answer for everyone. My mortgage is at 2.95%, I only owe $74,000 on the house, and my job is as secure as a job can get, it would be kinda silly for me to pay it off early.
TAX deductible interest. It's a great consideration that we are having here in the comment section. But since 2017, your mortgage interest may not really be helping your taxes! Learn more in the latest video: ruclips.net/video/5WaeQsid6yY/видео.html
Your calculations on the investment income are wrong. Your investments get reduced every year with taxes. That money won't be available for reinvestment.
@@sblijheid in the case of taxes on investments, if you have this in a taxable brokerage account, but you only get taxed on (1) capital gains if you sell or (2) dividends. The growth is not taxed until sold.
Congratulations! You USA residents are very lucky and fortunate to get a tax deduction on your home mortgage and student debt!!! In Australia, loan interest can only be claimed as a tax deduction against INVESTMENTS. Since a family home is for personal use, any debt incurred is not tax deductible. We have to pay off the interest and debt AFTER income tax. That said, there is NO capital gains tax when we sell our family home.
@@malkov0001 While this used to be a thing - it's much less than it used to be unless you're paying over like $30K/year in interest... much below that and the "standard deduction" out weights the benefit of itemizing (i.e. taking a tax deduction on home interest).
Great video. Would you mind expanding on why you’re using the inflation adjusted return rate? Seems to me a better apples to apples comparison would be to leave it in, why remove it?
We lived frugally and paid off our mortgage 22 years early. Best thing we ever did. Expanded our business, retired early. Saving and investing. Seeing our grandkids. Volunteering at church. Peace of mind.
Amazing!!! Congratulations
Nice job.
Congrats! You are an inspiration.
Not possible to do by just living frugally you also had to have a low mortgage PMT vs Income and low tax, maintenance & insurance on the home. Probably a favorable LTV too.
22 years early is amazing, enriched your family instead of bankers’
Just paid off my mortgage Aug 9, 2023! I still can’t believe it. I’m going full force on investing now.
Woohoo!!! Congratulations 🎉
Thank you!!@@BobSharpe
Congratulations!!! 👍🏻
@@johnj.doublej8721 thank you so much!!
Congrats. I paid mine off in August as well. Now I'm all in on investing too! Most of the stocks are down that I would have bought so it's a double win 😅
I paid off my mortgage and it was the best thing I have ever done for myself. The peace of mind is priceless.
same
In the history of mortgages, no one has ever regretted paying it off. Well done.
Priceless!
100% agree!
And yet you lost 100k😂😢
Some issues that undermine this analysis:
First, the TLDR version:
1. Don't adjust your projected rate of return from your investments to reflect inflation unless you also apply the same inflation assumptions to your mortgage rate.
2. The results of your analysis are sound with the mortgage rate and investment rate of return assumptions you used, but a lower mortgage rate or higher investment rate of return would lead to very different results.
3. Being mortgage-free early is valuable, but it's also valuable to have investments that could be turned into cash in a pinch without taking on new debt.
4. You didn't cover the tax implications - the tax hit on investments, or the tax deduction for mortgage interest (although the second is covered in a follow-up video).
Now the long version:
1. You took the investment return from 10% to 7% to reflect the effect of inflation. It is very important to understand the effect of inflation on your investments. In 2053, you may look at your portfolio value in dollar terms and have made 10%, but if inflation averaged 3% over that time, your return in terms of purchasing power was more like 7%. This is what you were trying to capture by reducing the presumed rate of return from 10% to 7%.
However, you did not make a similar adjustment to the cost of your mortgage payment. You take out your mortgage in 2023 dollars. But you get to pay it off, not with 2023 dollars, but with 2024 dollars, and 2025 dollars... and eventually 2053 dollars. Those future dollars will probably have a lower value than 2023 dollars. Inflation eats away at the value of your mortgage just as much as the value of your investments. So if you have a mortgage rate of 7% but inflation is 3%, your effective "real" mortgage rate is actually just 4%. In dollar terms you're paying 7%, but the net effect on the purchasing power of your net worth is 4%.
By applying an inflation adjustment to your investment return but not your mortgage rate, you're not actually comparing apples and oranges.
In fact, for those who have a low mortgage rate (some people have a rate below 3%), if you assume inflation of 3%, their "real" mortgage rate after inflation may actually be negative, since inflation is eating away at the value of their mortgage faster than the interest builds up!
2. You assumed a mortgage rate of just over 7% - greater than your assumed investment rate of return. This is what drives your results: your mortgage rate is greater than your assumed rate of return. But for those who have a much lower mortgage rate, this analysis will get very different results. For those who got in when the mortgage rate was 2.5%, 3%, 3.5%, if you can invest at 7%, you're absolutely better off doing that than saving 3.5% or less.
3. You talked about the freedom of being mortgage-free, and this does have value. You addressed the alternative of using investments to pay it off early - and the risk of a market downturn right when you want the cash. Those were all good points. But there's another point to be considered: when you make a payment on your mortgage, that cash is no longer available to you. In terms of your net value, it's reducing your debt, which is good. But in terms of having cash on hand to cover an unexpected expense, it's gone. Investments, on the other hand, can, if necessary, be turned into cash to cover an unexpected expense; if that happens during a market downturn it's going to hurt, but you still have the option to do it instead of taking on new debt.
If you pay off your mortgage but don't have much cash on hand, any unexpected expense will be painful and could force you to take out new debt. If you have investments and you have an unexpected expense, you could sell your investments. Of course, a good emergency fund will reduce this risk. But if your emergency fund gets overwhelmed, having assets you can turn into cash is good.
4. Taxes. This can cut both ways.
If you do not invest in a tax-advantaged account, taxes will reduce your rate of return. A 7% rate of return might look more like 5% after taxes, depending on your tax bracket. So the nominal rate of return you make will probably be cut down somewhat by taxes.
On the other hand, mortgage interest is tax deductible. If you pay off your mortgage early, you cut your mortgage interest payment faster, which means you reduce your tax deduction - and therefore increase your tax liability. Paying only the minimum mortgage payment, on the other hand, will keep that mortgage interest payment and the resulting tax deduction higher. But - many people will be taking the standard deduction, so this won't help them at all.
These two effects can offset each other. The followup video linked in the pinned comment gives a good explanation on how the mortgage deduction may not help you. But if it does, this can also help tip the scales one way or the other.
One further note:
You know exactly what your mortgage interest rate is. If your mortgage rate is 7%, every extra dollar you pay on your mortgage will save you $0.07 per year.
Your rate of return on investments, on the other hand, can be variable, depending on what investments you make. (fixed-rate bonds are predictable, but give a lower rate of return.) The S&P 500 has historically averaged 10% in the long run, but there's no guarantee this will continue into the future. If your mortgage rate is 7% and your investments make 5%, you would be better off paying off your mortgage. If your investments make 20%, you should be investing (but good luck maintaining a 20% rate of return over the long run). In the long run, 10% (before taxes) is probably a reasonable prediction, but it's not guaranteed.
Outstanding. Thank you!
Please pin this comment
go off potato skunk
Nailed it. This video is just another click bait.
Great to know! Please, make some content on your channel to share more. Thank you
At 25 my wife and I had a stack of cash from working and saving diligently. Put 43% down on a cheaper home in a low cost of living area. About six months later we received a letter from our mortgage holder which showed how much we paid in interest vs principal. I was so upset at the difference that my wife and I walked into the credit union the very next day and paid our mortgage off. I wasn't about to get scammed. Fast-forward six years and we're happy to be mortgage free and chose not to upsize our modest home. Sometimes I wish I invested the money instead, but having no home payment allowed us to both change industries and completely change our life (soo much better work-life balance!). I'm a proponent of paying off mortgages early, because of the freedom it provides! I don't care if you have a 2% interest rate, I'd rather not be forced to work for that payment any longer than needed :)
Amen and well said!
Same here. Not having to pay rent or a house payment makes me much more free.
🎯
and THAT should be the American Dream!! good for you!!!
If your mortgage rate is 2%, you could invest the money at a rate > 2% and pay it off even earlier.
I’m two weeks away from paying off my second home at 2.75%. With both houses payed off I’m going full stern towards future investing!! It feels great to be mortgage free at 39!!
When you can earn 5% on government bonds?
Wow, that’s awesome 👏😀
@@SaloneSaturday that is the problem people just let their emotions run their lives, rather than make a good decision based on the financials. He even loses the interest right off.
LOVE IT!!! Congratulations!!!
@@terencejlewis peace of mind may be more valuable for them than money, but 2.75% should be no barriers
Math is fun. Bottom line: Paying off my mortgage gave me peace of mind which I find absolutely priceless! I followed Dave Ramsey's advice, walked through the baby steps, read Total Money Makeover and went through Financial Peace University. Wasn't easy, but TOTALLY worth it. Cheers!
Lol 😂
I paid off my $187,000 mortgage in 3 years and 3 months. I was investing 15% of my income into retirement but stopped all investing for the last 8 months as I was getting closer to paying it off and I set a goal to pay it off by my 37th birthday. I ended up beating that goal by 3 weeks. I have literally zero debt now. Words can't describe the feeling of peace you get when your house is paid off and you have no debt whatsoever. Now I'm dumping a ton of money into retirement and purchasing several items I was holding off to buy until the house was paid off. I have a couple pretty cool vacations planned for this year too. I will add that I have been a Dave Ramsey listener for many years and his show was a huge motivator for me. Life is great!!
Congrats! Well done!
That's impressive! I'm a couple years older and still have a good while on my mortgage and some car debt. Both low interest at least. But I'm only doing about 9% investments and 7% into an HSA monthly. Match, HSA then Roth with what's left.
Its a long debated argument but ultimately paying off your mortgage holds much more fringe benefits psychology. Ive done both and once i paid off the mortgage my whole attitude towards work and life in general changed for the better and savig and investing grew expediency due to this change in mind set. You can be bolder and more aggressive once you know your home is yours and it encourages you to grow more like you probably wouldn't when you have a mortgage hanging over you.Great video.
Thanks… and when all else fails… you can just…..go home
@@FreethemGuyz exactly!
Making decisions based on emotions instead of math is why Americans stay poor
Not really yours though…
Our property taxes and insurance climb at an amazing rate so that when we pay off our house 3 years from now we will be paying around 60 percent of what our mortgage was. Not that exciting to pay off the mortgage when this is the case.
@shiscarp That is impossible? Besides, if you rent, you are paying property taxes in the rent money you pay? If you look at it like that, then you never own your car either? Because you pay road tax?
not having any debt is peace of mind that you simply can't put a price tag on.
You're so right!
You can, if you had mortgage at say 2.5%, you pretty much lost thousands in gains over the loan period by paying it off early. That's your price for "peace of mind".
You owe property taxes and insurance forever.
@btafan11 if you rent you owe way more than that every month to someone who profits off you not buying your own home
@@btafan11 prices paid for various services in the area that you live.
We paid off our mortgage on August 14th and for me the biggest thing is the freedom. Now we can invest and grow right before retirement or at least that’s the plan. 😊
Love this!! Congratulations 🎉
Paying down your mortgage does not equate to freedom. You still on a hook for other expenses. Like property tax, bills, insurance, repairs, etc. Freedom is having your investments pay your expanses. Not having mortgage is great, sure, but equating this fact alone to financial freedom is a mistake.
@@geeeee8268 You are absolutely correct. However, there is freedom from the pressure of the mortgage but not total financial freedom until passive income can pay your bills. That is the distinction.
what was your interest rate?
You have taxes with everything. Property taxes are never going away. However, all the fees and taxes associated with license plates doesn't stop me from paying off my car. So why wouldn't I want to own an appreciating property outright?!
The other thing to consider is that when you get close to paying off the house, most people paid off even quicker. Not only do you have more money to invest, but you have more money for savings which gives you a more secure future. It’s way better to pay off the house then to invest.
No, it isn't... at least if you locked in a low interest rate on the mortgage. If it's costing you 3% to keep the mortgage, and you are making 10% in the stock market, then that's 7% profit you're keeping.
@@Psuedo-Nim Your logic dose not follow. The same time passes either way, the only question is, after a set amount of time has passed, under which condition do you end up with more money.
Paying off my mortgage gave me an ease of mind, which is priceless. Not paying off my mortgage feels like I am borrowing money (paying interest), hoping I have a positive return in addition to my interest rate.
it's NOT priceless. there is absolutely a price associated with that decision, and you've now paid it.
The issue is most wealth for average people is in their home. If you pay off your loan you lose a easy way to leverage a lot of debt. Though the risk is lower it’s still risk
Many folks have interests rates sub 4% (2.9, 3.1, etc.). I suspect if you ran your calculations with one of these mortgage rates it would show a different story. It might we worth doing a follow up video and showing the math based on various mortgage rates, so that folks could see at what point it is better to payoff vs invest.
This. 2.8 percent here. I’d rather invest than pay it off early.
If you are below 3%, it makes sense to invest in higher returns.
3,5 here and peace of mind being mortgage free is way more valuable to me. Plenty of time to invest after hopefully. Plus my 401k is still working. It’s just such a personal choice with no right answer
If you’re below 11% it makes sense to invest in the stock market. This guy chose a lower rate of return in the stock market than his interest rate.
The stock market does not match his assumptions.
@@ThomasReedy-j6u Stock market - inflation = his 7%. Not counting inflation doesnt match reality.
Interesting way to calculate between the two. For us we paid off our mortgage early and took us 8 years of living below our means and putting all yearly bonuses and everything at our mortgage. At age 38 I became mortgage free. Since then I have been maxing out my 401k and Roth IRA and having 0 debt of any kind we built up a 2 year emergency fund in case we lose our job. So glad we did it because peace of mind definitely beats everything as we feel semi retired and no more anxiety of losing our jobs! Also time is the most important to us, instead of 25 years later to be in this situation, we can enjoy it now! It also allows us to save 35-40% of our income and with two kids and funding their 529s it is an incredible feeling!
If you had put some of that money into max'ing out your 401K, HSA, and Roth IRA instead, you would have enjoyed 8 years of tax-free gains during one of the biggest bull runs in financial history.
@@DimaUkraineYT - Let's say you owe $200K on your mortgage at 5%. That's about $1100 per month. If you had the $200K in your 401K, and the market went down 25%, you now lost $50K. If you lost your job, you now have to pay your mortgage, and your likely dipping into savings or your 401K. Yes, this is a worst case scenario, but it happens. Not paying off your mortgage is basically leveraging your investment. I'd rather payoff my necessities like a home, then invest.
@@JohnBowl14690 This is obviously a very personal decision for everyone, but not all leverage is the same. The leverage you get with a mortgage is typically the best you can possibly especially if it's at a lower rate than inflation, and it's backed by an appreciating asset. If you got a mortgage for below the inflaiton rate you essentially got free money from the bank. Any cash you have, you can park in a high-yield, FDIC insured savings account that in essence PAYS YOU for not paying off your mortgage. Leverage is a powerful tool that even the most successful, cash-rich companies like Apple and Microsoft use to their benefit. That's the interest side of things, that doesn't even get into the tax benefits you get from holding a mortgage. Paying off a low interest mortgage in this environment is terrible financial advice.
At 2.625% I'm making minimum payments on my 15 year mortgage. Makes 0 sense to not invest instead.
@@SRD1281that's too logical and not emotional, this won't work on RUclips. Just look at the calculations done at 7.18% interest and pay of mortgage that's at 2.75%. 😂
The peace of mind, the ability to live on a single income if needed, the ability to say FU to an ahole employer etc etc biggest game changer, sure investing should be the next step but paying off the mortgage is step one on unlocking the cheat code of life!
I had been weighing the worthiness of paying off my mortgage (around 15+ years left @ 3.875%). If I sell off a majority of my stock portfolio, I could pay off my mortgage loan. However, considering that the monthly mortgage payment consists of (principal)+(interest)+(RE tax)+(home insurance), paying off the loan only relieves me of the mortgage principal and interest portions which is only about half of this monthly expense. I live in a high tax state. Thus, in return for cutting out only about $1K from my monthly expenses, I would lose the majority of my liquid net worth safety cushion along with the dividend income it was generating. I could only conclude paying off my mortgage is not worth the risk.
Did you factor in taxes you have to pay on your earnings @ withdrawal time?
Another option would be to take out a loan against your liquid assets to pay of your home. Essentially doing a refinance but for a much shorter term. You could possibly save on interest as the loan is fully backed. It’s how most Rick people deploy cash because it’s cheaper to pay say 1-10% interest vs paying capital gains.
But youre automatically gaining that wealth back in your home value. Whatever your home is worth would be your new net worth. And then youre free of debt and free to invest more aggressively.
dividends?....you could get 5% in a savings account...or pay off 3.87%...its a no brainer.
@@rsjcmp2285 Or you could pay off your home thus making it a hard asset that you own and saving untold thousands in decades of interest payments, then invest twice as much for all those years you would have still been paying off the mortgage.
Finally, a financial content creator that I agree with, besides Dave Ramsey, that says it is better to pay off your mortgage than invest the money.
I am making crazy extra principal payments (I made 5 principal payments for September), and I am scheduled to pay my mortgage off in 4 years.....cutting 17 years off my 30 year loan by paying it off in 13 years. I started off slow in the first few years, but then my pay started growing, and now it is like a game to throw as much money I can at the mortgage and watch the balance go down.
My goal is payoff before my 59th birthday.
Great content....you got my sub.
@@Psuedo-Nimit's foolish to go into the debt in the first place. It's just foolishness we're accustomed too
@@viatori5566 Is borrowing your parent's car to get to work as a high school student foolish? You are indebted to return the car to your parents but that car helps you earn money. That's a very simple example but the point is that debt CAN be used to generate more income and wealth than would be possible without taking a debt - it's all about whether that debt is used wisely.
@liquidmetal7875 that example isn't even in the realm of similar to loans. No. If you don't have money Hou can afford to lose on a business or house or student loans, you certainly can't afford to lose the banks money.
@viatori5566. It was a very simple example. If you borrow something you owe it back but you then have that something to offset you owing it back. If those resources allow you to gain more than the “interest” charged then you receive a net benefit. E.g. If a student on track to be a doctor takes out 400k in loans it’s no problem when they can earn 500k-900k or more each year - something they likely couldn’t do without incurring debt. They will likely earn more over their lifetime than someone who avoided going to med school due to not taking on student loans.
@@viatori5566 That example is great, you simply fail to understand. Investing money isn't losing it, yes there is risk, but paying off your house is just another form of investment and just as markets can crash, housing markets also crash. Smart choice is to invest into whatever will yield highest returns while keeping risks minimal.
I like the idea of doing a little of both. Either $100 each into investments and mortgage payoff, or maybe do some market timing. For instance, if the stock market has been running really hot, do $200 on the mortgage, if it's been dipping, buy the dip with the full $200. You won't always get it right, but it's kind of scratching both itches at the same time.
One thing you didn’t take into account was after you paid off the mortgage early, what happened to the extra $200 monthly? If you also invest that then the monthly investment amount goes to $2,432. Which makes your investment returns much more than if you didn’t pay off the mortgage.
The $2243 was including the extra $200. The original payment was $2043. Total payment was $2243.
Also neglected to factor in that when you pay off your house, only the P&I component is freed up. You’ll still be on the hook for taxes and insurance that are no longer being held in escrow. When the mortgage is paid off, you wouldn’t be able to dedicate the full (former) mortgage payment to investing.
@@jasonmconnors as someone who lives in nj, paying off the mortgage still gives you a high monthly payment lol
One thing to mention - many people have mortgage rates less than 3% - at that rate, it almost always makes sense to invest instead of paying off the mortgage.
The largest advantage is not having to pay the mortgage. In our case that is 36,000 a year savings. Times ten years that is 360,000. And the next advantage is the weight off your shoulders. The third is never having to pay that interest ever again. We have now not paid a Mortgage payment in 11 years. The running joke i say to my wife every month , " its time to pay the mortgage and car payments" She says back to me " we already paid off all those bills" I say " Oh yeah i forgot"
I like your joke.
Every month you say that.
Its a GREAT spot to be in.
Funny, but probably not smart financially.
@Stashmo yea now they have an extra 3k a month to just spend and invest terrible decision
We paid off our home, first order of business. Even if dollar-wise it was half the return of investing, there is no security quite as reassuring as owning your home.
Paid off our thirty year mortgage in five or six years.
Having enough money in your investment account to pay off your home, and then some, is more reassuring.
@@phillipsusi1791 If there is a crash, both your income and investments get hit at the same time. Can you sell with a 40% dip?
This only makes sense if your interest rate and rate of return are similar. If you locked in a 3% mortgage like many did during the pandemic it makes no sense to pay off early and invest extra money you have for 30 years instead
I think this is the smartest take I've heard yet on investing vs paying off debt
Only works if you have a high interest rate on your mortgage. I have one at 2.5%. No way paying off the mortgage early makes any sense.
Do some of both. As you get raises and/or continue to work on trimming your budget, you can continue to increase the percentage that you invest and the amount extra that you pay extra on your mortgage. That way your eggs are not all in one basket and you are making gains in both areas.
Facts, what we've been doing. Every bonus, raise, etc. both the monthly mortgage overpayment amount and monthly savings amount get increased.
Do neither, put your money into cash flowing real estate and your income will pay for your house and you’ll build equity.
Even without a reasonable saving on intrest, a debt free home is priceless.
No it’s not. This is a math exercise, stop trying to being emotions into it
How are you going to factor in inflation for the stock investment, but not the mortgage? Inflation is good if you owe money, bad if money is owed to you. Your calculations were nulled once you made that critical error. The only way paying your mortgage off early is better than investing will be if your interest rate is higher than your ROI, plain and simple. You can make anything look good if you skew the math.
Exactly my point , so conveniently forgot to factor inflation in paying off the mortgage, such bad advice on RUclips could impact someone's life
Sure enough, I came to be 58 year old and got the axe (for being at a high pay grade). Luckily, I had paid off my mortgage the year before. And so, I retired comfortably at 58 and lived happily ever after (well, so far).
With all my free time, I watched RUclips videos on how to invest, and the result has been a doubling of my retirement funds over the last three years. This would not have happened if a mortgage millstone was still hanging around my neck. Now I'm collecting Social Security and have not even started to take distributions from my retirement funds. Let em grow, I say!
Good on you!😊
Congrats. Whose channels do you watch?
Such an uplifting post! One of us made it 😁
🎯
Glad for you!
One thing to keep in mind is that a person who choose to invest in stocks can also pull from their investments in bad times like a layoff. To do the same with the house you'll want to open a HELOC. However, a HELOC is a loan.
That said, if I had a 7% rate on my mortgage I'd want to pay it off early since it's guaranteed money. Today a huge amount of people have a 2%-4% mortgage.
exactly; I can get higher % interest returns from a high yield savings account than my mortgage interest rate. my ROI from investments this year is more than 3.5X my mortgage interest rate, and this isn't what I'd call a great year in the market.
You'll pay a lot in taxes and possibly fees
Not exactly. A high yield savings account is simple intererst -- a Mortgage is amortized so the rates are not comparable. Also ROI from investments must account for taxes on the gains, 15% on long term capital gains. Just FYI @@zoomzoom3950
@@TexicanMrYou only pay taxes on gains, and only after you withdraw. There's low free brokerages out there. Plus, you shouldn't be withdrawing a lot all at once...
@@vulpixelful $100K/yr and 4 Kids= no taxes, Child tax credit
I'm planning more next year of putting a little less in my investments and focusing more on paying off my student loans. I know I won't be able to pay off the full 25 grand left with what I make, but I really want to make a better dent in it before the interest completely barriers me. I have made a lot of progress, since I never stopped paying during the pandemic, just smaller amounts, I've already paid off 1 of my 6 loans, and around 1,700 away from another one being done! I don't care if paying them off might lower my credit score, I want to be done with them by around 35.
With a 7% mortgage it is a no brainer for making extra payments (or paying it off early)....even use velocity banking (chunking with balance transfer offers usually 3-4% fee + 0% for x months).....for a mortgage under 3%, it's a personal choice (in my opinion)
Great advice!
It's a pretty complex calculation as you have to consider your interest rate, market conditions and tax impact. If your interest is 7+ percent and you can swing the extra money it's a no brainer, however if your rate is 3% you can make risk free interest at 5+ percent then you may need to think heavy on it.
SP500 had low growth for more than a decade, from 2000 to 2012 it went up and down oscillating between 756$ and 1400$. In those 12 years, performance was not as good as between 2012 and 2024. In fact, those two decades roughly were drastically different in yields. My point is - it all depends on when you get in and when you get out. Repaying your mortgage is a sure win because it is predictable. SP500, it may go up 3x in 7 years, it may go down 15% in 3 years just at the time you are retiring. The whole "average" term is misleading, it doesn't mean that the "average" is constant smooth curve.
There is nothing worth investing at this time of uncertainty and volatility. Paying off the mortgage, even at low interest, is FREEDOM - PRICELESS!
If you don't own your home outright and haven't paid all your debts, then you do not have money to invest. Investing in the stock market and purchasing assets is basically gambling no matter what you may call it. Playing with numbers maybe fun but it's easy to fool yourself into investing money you need to keep a roof over your family's head. Pay off all your debts. Buy the best health insurance you can afford. Save for emergencies. Then start investing with money you can afford to lose. If you have a matching retirement plan at work that is another issue. Some companies allow you to choose investments and some limit where the money goes. Do your research to balance the choices and keep an eye on the quarterly reports. Don't forget that someday you will have to pay income tax on this retirement money.
This is a great analysis. In a time where the trend is to tell people to rent where they live and invest everything else, you do a really god job at explaining the opportunity costs associated with not being mortgage or rent free !
For every dollar you put into a mortgage, you have to earn $1.40 (because of taxes). Now look at the reverse, the dollar you don’t have to spend on mortgage interest (by paying off a mortgage early) is worth another 40% to you. You can’t be taxed on money you didn’t have to spend on mortgage interest because you paid a mortgage off early. Between that benefit and having greater freedom with life choices, get that debt paid off as early as you can.
Im 52 and house is paid off. I'd rather have a paid off house than anything (besides good health) i think its a personal thing and it's about how someone approaches life. Im single so no second income to fall back on, so it is important to me to eliminate or to never saddle myself with debt. Ive always been the type to figure the worst outcomes and living waiting for the other shoe to drop. A nice way to ride out a economic downturn or job loss would be in a paid off house. I was homeless once for about 4 years a long time ago and i think that gave me a permanent fear of being homeless as well
Great explanation of the the different angles to look at this but taxes play much too big of a role to only be introduced at the 11:30 mark. Combined state and federal income tax burden is often 30 to 40%. So right in the first comparison the $121,000 saved in interest shouldn't be compared to $161,000 in investment growth. You need to subtract income taxes from the investments
If you should pay off your mortgage early entirely depends on the interest rate you have. If you have a 3% rate, ride that to year 30. If you have 7% like in this example, just pay it off, the potential gain from investing is not worth the risk compared to the guaranteed savings.
Simply said and 100% true
We paid off our mortgage early and never looked back. Can’t put a price on peace of mind!❤
Love it!!
The freedom and confidence gained by not having a mortgage can also increase your income. You'll be better at negotiating and creating additional income streams when you're not desperate to make payments.
What is the biggest/most valuable asset?..................... Time....... why spend the most valuable asset of 20-25 years of time to pay off your mortgage?............. Pay off your mortgage as quickly as possible and then you have the most important asset by 20 years.................................................. Time is better then money in the bank every time.
We paid off our mortgage in June. Give me the freedom to be mortgage free any day. Being in my early 50's I still have time to invest more now before retirement. It's a great situation to be in for sure.
I paid off my house long time ago. Now I am living on dividend investing without worries.
This was great. Thanks for making this! I was toying with the idea of building a calculator app that would help with solving this exact comparison. I liked all the numbers you used for your scenario. It played out more or less how I expected ( I was actually surprised that investing the 200$ would in theory beat out paying off the mortgage by an extra 200 in the first scenario even when mortgage rates are at 7%). I liked the amortization schedule you showed. Something else to factor in on the side for why you might want to pay off a mortgage early is to factor in bringing your total equity up in order to not have to pay for things such as PMI, as well as the ability to take out loans against the equity in your home, depending on the interest rates. I've been paying a bit extra each month, and thought it was a little silly as it isn't the mathematically most optimal, but after looking at this schedule, and how sideways the market has been the last couple years, I think it will probably all even out in the end.
there is a calculator,check dave ramsey lol
Point of order. Given amortization, the "rate of return" on your extra mortgage payments is much less than the mortgage rate, as the majority of the interest is paid in the first half of the term.
Given 65% of homeowners are paying less than 4%, and 24% of home owners are paying less than 3%, it would be better suited for Americans to see those comparisons versus 7.18% interest rates, unless your motive is to justify paying off your mortgage early versus saving for retirement
Exactly. He used the highest interest rate possibly to push the pay home off early message
The biggest value is the value that numbers can't provide. It's the financial freedom and peace of mind that counts the most
its really about equal a few grand difference is nothing over 30 years. but its interesting because I watched a video like this before interest rates skyrocketed, it wasn't even close and investing destroyed the extra mortgage payment. very interesting
That shows that it depends on the mortgage rates. If you get a 2% mortgage rate, then yeah. I'm personally not paying that off.
It depends on your interest. My rate is 2.9 percent but CD’s are paying almost 5 percent. It’s a case by case basis.
Thank you! I have been an advocate of paying off home mortgage early. Currently, I am 6 yrs away!!!
Congrats!! The home stretch!!!
You included appreciation of your investments but not the appreciation of your house. A true comparison should be the combined return rates of both combined with each strategy.
It makes no sense in your calculation to adjust the estimated S&P 500 returns to account for inflation the way you did since you are not accounting for the impact of inflation on the price of your home or the true cost of each monthly payment. You should use nominal dollars for this calculation. The annualized nominal return of the S&P 500 is likely to be 10% over the next 30 years even if inflation is eroding purchasing power. If there was 10% inflation for several years and the S&P 500 appreciated at a 17% rate (7% real rate plus 10% inflation), the value of your stock portfolio would be increased by inflation even though the purchasing power only increased by 7% annually - you could sell some of that portfolio to pay off your 7% mortgage early and come out way ahead of where you would be if you overpaid your fixed-interest-rate mortgage each month.
Agree. Great point! 10% average return is just that, 10%! Inflation should not decrease the value of the portfolio. Not to mention it is more likely to average a 10% return over a 30 year period than a 7 year period.
All very fair points from both of you. I should've just stuck with 10% - you'd be surprised the people who get fussy about inflation and how it should be 7% and not 10% to account for it...at the end of it all - a smart investor and conservative spender will always be ahead.
@@BobSharpe It might be beneficial for you to see how well stocks did during inflationary periods like we are currently experiencing. I do not know how long the current period of relatively high inflation will last, but it the ownership of real assets are (supposedly) a good hedge against inflation. Real estate is a real asset and shares of stocks represent claims on real assets. If inflation actually helps generate higher nominal stock market returns, it seems as though one would be better off taking one's time paying down a mortgage which has a fixed rate, provided that the fixed rate is below a certain threshold level. Perhaps you could do a video where you calculate what that threshold mortgage rate could be and how to calculate it?
Thank you!
Bob Sharpe should really amend the video to explain this. It's misleading people.
took too long to find this comment
Did he say anything about still paying taxes, insurance and HOA after paying off the mortgage? Because if it ain’t included in those +$2200 left “free” every month… that’s a huge difference maker
Great point, and no that was not included in that $2200. The $2200 is only P&I. Since you have to pay tax and insurance with or without a mortgage, those figures aren't figured into the info in this video.
The interest rate on your mortgage is critical here. My current mortgage rate is 2.15% So I'm heavily investing in the market so that my dividends will pay my mortgage. From a layoff standpoint, I'd rather have money in the market/bank to pay the mortgage for the time I'd be unemployed. It's really about how much liquidity each person feels comfortable with. For the tax side, I use M1 and can take low interest loans against my portfolio if needed, which is tax free.
Risk tolerance is what is forgotten. Lower cost of living from no mortgage gives you more space for a new job, a new business, super saving, a sabbatical, etc.,…
Hey Bob! Just came across your channel today! Really great content and very informative. We definitely agree on paying off the mortgage. As an entrepreneur, I can't wait until I never owe a single penny to anyone again! Congrats on your success and thanks for the great content!
Awesome! Thank you!
paying off early is a 100% GUARANTEED return of over 7%. Conversely, the S&P has no guarantees. Simplified lifestyles pays dividends that last.
Totally!
You also have the issue of capital gains taxes. In your example, the guy who invested $200 per month for 30 years is facing a $32,000 capital gains bill. The guy who invested the entire mortgage payment plus $200 for 7 years after paying off the mortgage not only have a larger investment account balance as you indicated, but also a capital gains tax bill of only $10,000. The higher balance combined with the tax savings totals $27,000 more!!!
Good point!
One other thing not considered is human nature. The person that pays off their mortgage early is unlikely to tap into their equity to make a frivolous or extravagant purchase. To pull money out of that investment, they need to get a home equity loan or similar. People are unlikely to pay off their home loan only to take out a new loan on that property. If you had invested the money instead, especially when invested post-taxes, it is fairly easy to pull money out to take a vacation, buy a car, etc. This happens more often than not.
Very good point
I have my mortgage locked in at 2.85 percent for 30 years. Investing instead of paying it off is a no brainer.
Paying off your mortgage first is always better. The amortized interest will kill you and your tax deduction is less than what youre paying in interest. A million dollars in interest over the life of the loan could be invested.
Well produced, concise, video.. says it all pretty well. I am one of those who opted to refi to 15 from 30 years, and over 24 years and 3 houses later.. paid off the balance.. have no mortgage anymore for the last 17 years. For me, most of the reason for this was that while you talk about layoffs, I saw that ageism has really hit in such fields as tech, and it was increasingly apparent from the early 2000's that being an older worker, candidate for jobs, etc., was going to catch up with me economically.. if I didn't do something SOON. Good thing I did.. when 2008 hit and jobs were scarce.. I had to live on a meager $17K one year! I shudder to think what might have happened if we had stayed the course these "tik tok investors" have all been pushing of leveraging your mortgage debt to build wealth. I agree with your assertion to pay off the mortgage as soon as practical.. and really ANY kind of loans or debt as immediately as possible. You are indeed better off with all of your money NOT going out to curb debt!
Don’t know if you consider this later in the video, but if you have a lower interest rate than 7.18% then the math doesn’t work out the same and investing instead of paying off the mortgage would probably be more financially advantageous. Yes the rates are 7.18% now, but it’s not unreasonable to assume that people could refinance in a few years to a lower rate.
You can also run the risk of foreclosure on a paid off home if you don’t pay property taxes or HOA fees which do go up and can go up dramatically.
Thank you for the video! It’s so nice to see the same minded person!
We paid off our mortgage on Oct 2021. It took us 11.5 years to pay it off. In the last 3 years (2019-2021) we lived on rice, beans and veggies (we are vegetarians;) ) During that period of time we also managed to maxed out our 401k contributions. Basically, we were living like students 😅and that was fun!!! Now we are on the Baby Step 7 (according to Dave Ramsey) and we enjoy our freedom 😊
You can play with all the numbers you want, but at the end of the day, if your mortgage balance is 5000 dollars and you somehow become unable to pay, the bank is going to take that house back. It's only really yours once that balance is 0
Very true
I paid off mine when I sold a rental property when prices were crazy. House is only 7 years old best part I can say is peace of mind. You don’t fear a job loss as much when you don’t have $1,600 due at the end of the month. But you also have to remind people you still have to pay the property tax.
But the capitol gains you paid selling the rental probably KILLED you. That’s why I’m hanging on to mine as long as possible.
@@jamesjoslin7586Not when you lived off of your property for 2 years
Pay off early and you also run the risk of defaulting on loan if you don’t have reserve to keep going if you lose job etc
So don’t over do the extra payments and save some for future payments
Thans for the video. I've been doing a hybird style. Some in investments, some in the mortgage.
Its excess fear that incents people to pay off mortgage even though the math for most situations will show its best NOT to pay off mortgage, esp people with interest rates around 3%.
Sure, if you lost your job youd have risk of foreclosure. But how often does that happen? And there are ways to mitigate that risk. And usually youd just sell if you had to. And in the very rare worse scenario that you are foreclosed on, so what? You will recover pretty quickly.
Perfect video... For me, you can't beat the feeling of no debt.
Your math is spot on. We are 41 and 35 and paid off our house 3 years ago and now focus on investing and are catching up big time.
Really great video. I have tried to get my wife to invest in buying a house when the mortgage rate was really low. We were also investing monthly in the market (not that much but still). It was the right decision because now the mortgage rates have almost tripled!
Yea but you have to pay rent which comes off the top of investment earning. And you have a Landlord.
Great video, I was just talking to someone about this the other day, they were like invest the money instead, obviously you'd also have to pay taxes on that 40k return from your investments.
Call me crazy but I'm going with trying to pay mine off. I have 13 yrs until I'm 65 and have 22 years left on my mortgage. If I ever want to retire I need to get rid of my mortgage payment. I owe 158,000 @ 3.75% my payment is $1450 a month, I figure an extra $500 a month should do it. I do have a 401k and a few small investments but I'm pretty illiterate when it comes to investment. I figure my safest bet is try to knuckle down and pay my mortgage off.
Its all about RISK
Paying off your mortgage allows you to know two things!
1. When you will be debt free
2. When you can save without debt.
When you pay the interest only on a mortgage and invest to hope that after 25 Years you have enough saved to pay off the mortgage in my opinion is high RISK. On paper it sounds great. What could go wrong? Well if we use 2023 as a guide we see that Inflation and Mortgage interest has gone through the roof! That will mean that many will be paying 1000s extra before retirement.
When you know the life span of debt and can reduce it why on earth would you gamble a sure thing?
Spot on!
Paying off your home is a huge weight off your shoulders! Paid my primary off at 34! Now we work and enjoy life!
So true!! Congrats on paying off your mortgage too!!!
Mortgage free after 7 years. It is the best feeling ever and each time I approach my house, I get teary. Still unbelievable to my husband and I.
That's so awesome!!! Congratulations!
You can go a bit further in this. % yield per dollar actually increases the earlier you are in the mortgage because the interest is spread out in such a way you are paying more interest than principal at the start of the term, and then it decreases the closer you get to the 30 year period.
So you should try this again, but pay an extra $200 a month in your mortgage until you have 50% equity in the house and then switch to investing and see what your returns are.
We paid of our mortgage we are saving over $3,000 a year in interest and now have very few bills. The house is the money.
Amazing, Congratulations!!
Great video, thank you. But the most important thing is that your home is not an investment. It's your lifeboat, your suit of armour, your immune system. A paid off home allows you to survive job losses, accidents, sickness and bereavement. It gives you resilience to make it through to better times.
Good on you for bringing light to this Bob. Lots of people are pulling risky moves without first covering their principal home residence. Investment debt is good, debt on your principal place of residence is bad risk management. You could end up homeless and this ties down a lot of money into a solid piece of investment. Most people would blow the excess money on crypto, gambling or excessively expensive cars/holidays if they had their mortgage money freed up. That way, when they do blow all their money in the future, they are at least mortgage free and safe.
Debt on your principal place of residence is investment debt...
A mortgage is using leverage to buy real estate.
Margin is using leverage to buy stocks.
well said. Also, most people that pay off their mortgage early talk about mental health advantages to having no mortgage. Without a mortgage, your freedom to take greater risk to start your own business or just to retire early can't be calculated as well.
The major flaw in this model is most mortgage payments include escrow payments, which can be 15-40% of your total mortgage payment. Thus, after you finish paying your mortgage, you wouldn't stop paying the escrow(taxes and insurance).
The monthly payment he used in his model was just for the mortgage for the $300k home and the assumed rate. Obviously you still have to pay taxes and insurance after you pay it off. That’s true either way.
It is fabulous not owing anyone anything! It’s called peace of mind and it is priceless.
Such a common question that comes up and this video effectively illustrates the different options and results for each option. Thank you for sharing 👍👍
Glad it was helpful!
You didn't consider that the profit on the money in the stock market would be taxed at capital gains tax. Also, you shouldn't count for inflation, because your. comparison is dollars in the future for dollars in the future. Instead, look at the real returns of S&P 500 index funds, because the S&P500 has churn and the index funds have fees. In addition, the house could appreciate in value. In addition, that 7% may be tax-deductible, in which case the real cash flow impact of the mortgage is lower. (It's complex. I paid off my mortgage early for similar reasons.)
This video is like a class on the subject. It is gold, and is a keeper on my Finance list.
Wow thank you!!
What people do not factor in is that when you pay off your mortgage you don't save the $2000 a month. You still have to pay property taxes and insurance. All you save is the principal and interest.
and you loose the stress that if anything happens you can loose the house. Which is priceless
U can reverse mortgage when ur old until u die to pay the property taxes
What? Weren’t they paying taxes and insurance when they had the mortgage? Comment makes no sense
Nice Analysis. Since the total value is similar (paying off early vs. Investing)- it boils down to peace of mind or personal preference. As I did not want to carry a mortgage into retirement, I did a refi from a 30 yr fixed to a 20 yr fixed before interest rates were jacked up. So, in effect, I am forced to repay early. If rates ever go down again, (or when), I could always refi back to a longer term to reduce my monthly burden.
@BobSharpe. May I add some very important factors
1. You should never gamble with the roof over your head, so if you pay off your mortgage and become disabled or unemployed, you only need to pay maintenance, taxes, and insurance in order to keep your home. Very important
2. In this litigious American society, if you pay off your house on Florida, it is your primary residence, and homesteaded, no debt can take it away except tax certificate.
Fantastic points, thank you for adding these in!!
Debt is Debt period! Best to have none. I always say wouldn't you rather get 5% than pay 5% ? Being debt free is freedom :-)
I am 62 and tell younger people that there is a big difference when you go to work because you want to not because you have to. It stinks to work just to pay bills ! When you have no debt and go to work and actually get paid and can keep and invest it life is good :-)
I’d rather get ahead with retirement saving over paying down a 3.5% loan.
Not all debt is the same.
Financial models are pointless for your primary residence. Pay off the mortgage ASAP and stick 3 years of property taxes in an interest bearing account. You don't know what the future holds and the security of knowing no one will take your home is priceless.
Bob, what happens to the numbers if you factor in possible withdrawal penalties and taxes on the investment gains?
I'm in Australia. Any dividends paid or any capital gains made on investments are taxed at your highest marginal rate. For the majority of (not all) Australians, this is 32.5%, which is a heck of a slug. It's a no brainer for the majority of us to pay down our mortgage as quickly as possible. The exception here, however, is that we can use our superannuation portfolios
(401k in the states) to reduce tax incidence down to 15%. The downside is that the principal and the earnings withing the superannuation fund cannot be accessed until the age of 60, unless there are extraordinary circumstances.
Bob, good video overall.
You made an EXCELLENT point on timescales. Paid off mortgage in 23 years (plus 7 years investing) vs investment for 30 years. A lot of people miss the boat on this one and make the comparison apple-oranges (23 year time scale vs 30 year time scale), so good job.
I have a little bone to pick though regarding the assumption of rate of return. By assuming 7% return, effectively assuming inflation will be 3% as you covered in the video, your stock portfolio alternative was using 2023-equivalent-dollars for the final number, resulting in a lower portfolio value that is not comparable.
Whereas your additional monthly payment alternative was not accounting for inflation at all so your final number is in 2053 dollars. 2053 dollars are less valuable than 2023 dollars.
To simplify: If 10% ROR becomes 7% due to inflation then we also must adjust the mortgage interest rate down by 3% as well from 7% to 4% to make it apples-to-apples. Alternatively, we leave both rates as they are since that is 1 less assumption to make and simplifies the math.
Leaving both rates as they are (10% ROR and 7.12% interest):
Alt 1:
30 YR, 10%, $200/mo invested = $459,828 portfolio value in 2053 dollars
Total loan interest: $427,252
Alt 2:
Mortgage Early Payoff (200 extra per month); invest for 7 years after to reach 30 years timescale.
30 YR (paid off in 23yrs ), 7.12%, 300k, extra 200/mo towards mortgage = $2020 + $200 in monthly budget (as covered in the video)
7 YR, 10%, $2220/ mo invested = $271,175 portfolio value in 2053 dollars.
Total Loan interest: $307,307.
Alt 1 cost more in interest, but in the year 2053 you have 152,522 more dollars than in Alt 2 because Alt 1 essentially outgrew Alt 2. The amount of interest paid is irrelevant since the assets at 2053 = portfolio value in 2053 + house value in 2053. The house value is independent of the mortgage, common to both alternatives, and thusly can be ignored.
Obviously, freedom is, well, freeing and that is a good thing. However, if exclusively on the basis of maximizing wealth at a particular future date is the goal, Alt 1 is the better option. Alt 1 is the economic equivalent of having an additional $85,000 dollars today (2% inflation assumption) or $63,000 dollars today (3% inflation assumption), which is 1-2x most Americans median annual salary. Alt 2 is a guaranteed return of ~7% for 23 years which is nothing to scoff at of course.
The obvious con to Alt 1 is higher dispersion of results, but there is still wiggle room to come out ahead over Alt 2 even at an average ROR of 7.5%, which would be a HUGE market paradigm shift.
As long as average ROR exceeds the cost of debt (interest), the investment will always win out in the long run. PERSONALLY, 10% ROR (ideal) vs ~7% interest is too close for my comfort according to my risk tolerance and the intangible benefits of freedom and certainty. However, if YOU (the reader) has a fixed rate mortgage of less than ~4%, you would be a fool to pay off the mortgage early unless any of the following apply: (A) lack of spending discipline; the money has to be invested, not spent; (B) You HAVE to have the house paid off before a certain date (low retirement savings/annuity is a common reason); (C) your financial anxiety is degrading your mental health and the mortgage is the reason.
Always situational, there is no one correct answer for everyone.
My mortgage is at 2.95%, I only owe $74,000 on the house, and my job is as secure as a job can get, it would be kinda silly for me to pay it off early.