See Part 1 of this Video Series (the original video): czcams.com/video/CNS_JMAo8aU/video.html Also, carrying a mortgage for a "tax break" may not be benefiting you anymore. See this video on why: czcams.com/video/5WaeQsid6yY/video.html
It benefits me, depends on your tax liability and if you have enough write offs to exceed your standard deduction. Just saying you should have mentioned that in the comparison here.
What you said in the 2nd half of the video is exactly why I paid off my 3.5% mortgage early. It might not "make sense mathematically" to some people, but you can't put a price on freedom. Taking a 20% pay cut and only working 32 hours per week is balanced by not having a mortgage payment. Having a 3 day weekend EVERY WEEKEND is nice. Spending more time with the family, and working around the house on Friday instead of working for someone else on Friday is priceless.
It makes perfect sense mathematically. Everybody else is doing the math wrong. They're simply looking at the spread on the interest rate. What they're not factoring into that analysis is risk. They did not adjust for risk. Once you make a mathematical adjustment for risk, the math adds up.
Why couldn't you do all those things knowing you had a huge pile of money in the market? You know just because you choose not to put that money into paying off your mortgage early doesn't mean that money just disappears right?
6.5% rate on a 15 yr here- trying to pay off in 5 to 7 years. People don’t talk about the fact that the $ you earn investing is going to be taxed. Whereas the $ saved on mortgage interest is risk free and tax free.
Depends where it’s invested. If that difference is being invested into a Roth IRA or a Roth contribution of your 401k, you won’t be taxed. Those would be the same post tax dollars you’d be using to pay off the home early. Regardless, I’m still team pay off mortgage early, but just something you should consider.
Your scenario with a 6.5% mortgage has little to do with the video's scenario with a 3% mortgage. 3% mortgage interest is less than current inflation. There's no current math situation where it makes sense to pay off a debt that costs less than inflation over investing. Heck you don't even have to invest. High yield savings accounts are paying 5% right now. And the only thing that's taxed are dividends. Long term cap gains are also taxed when you take money out or may be negligible depending on your situation. And last...depending on the mortgage you can reduce the cost of the mortgage when filing your taxes by itemizing.
Mortgage payments are tax deductible, so if we were to use the tax argument, the money saved in taxes from keeping the mortgage longer is better than paying the 10% taxes on the capital gains in 30 years. Financially the money you "saved" from interest is much less than the capital gains from investing that overpayment, in almost every scenario where the mortgage rate is less than 8%.
@@rebeltheharem7028 Debt makes me anxious. I'm less focused because of that. Stress makes your health worse. Those two things cost you money. Lots of money. What people can do is both. Pay mortage and invest. At first focus on paying mortage, with just small % put for the investing. Over the time when your income grows and your debt is getting smaller change the ratio. Economically not the best. But it gives you some freedom, some security, and some profit.
What you are failing to consider is if you are paying the 200 dollars to your mortgage and economic turmoil occurs before your house is paid off. You no longer have any money to make your house payment and you have put all this equity into your home that the bank can now foreclose on. So you now have nothing. In the situation of investing the 200 you at least potentially have money to live on and could sell your house before the bank forecloses.
Right, you're still paying your monthly payment for 23 years. You put extra money on your principal but your payment stays the same. Economic turmoil happens at the 15 year mark you still have the full payment to make.
Agreed. Paying down the mortgage is an unrealized gain until you either sell the place, or it's paid off completely. If you lose your job in the meantime, you can't eat the equity in your house.
I paid off my 2.875% mortgage early. Yes, mathematically speaking, I *could* have made more in total returns with investing; but a major part was creating more security and greatly reducing my risk profile. Now having had no mortgage for a few years, my investing was able to be a singular focus, with the worry of market corrections. The psychological boost of no mortgage is something money cannot buy...
Glad to hear your success and congrats on financial freedom! I’m in a 2.75% mortgage with roughly 85k remaining to save for payoff. Should have it accomplished by mid next year.
@@hobbes1069 that's the idea! With no mortgage, consistent investing coupled with a decent stock pile of cash (for buying opportunities), gives you so much flexibility
Can’t tell you how happy and thankful I am we haven’t paid off any of our mortgages early. Thanks to low interest mortgages and the power of compounding investments at a rate much higher than 2.75%, we became multi-millionaires and financially independent in our early 40s. Much faster and much more securely than we would have if we’d been aggressively paying down those notes instead.
@@michalstelmach4203 The people who got their houses foreclosed on didn’t have the finances to start with to afford those mortgages. Biggest financial fraud the world has ever seen.
Remember that you pay tax on investment earnings. You don't pay tax on interest saved by paying off early (or by having an offset / redraw account). So another reason to hit the mortgage hard.
I did a little bit of both. Decided on biweekly payments and invested. After 10 years I had enough invested to pay off the mortgage. Maybe not the best financial decision, but I sleep great at night not having a mortgage and now supercharging investing. Good video 🤘
Another idea.... Pay a substantial amount down on your mortgage, and do a "Recast". This would lower your payment, as much as, substantially. The payment is low enough to be handled in the case of job loss or illness. The extra saved each month can be DCA'd into your favorite investments. Just another "what if"...... Thanks for your videos, Bob!
A few points to add with a paid off mortgage: 1) your emergency fund you need is much less, because you have no mortgage. 2) You become a much more stable investor because your aren't concerned about the market dropping because you don't need the money except for retirement. 3) You have less stress, which takes something off you mind, which helps you in many different ways including helping you focus better at your job....personally I got a promotion since my mortgage was paid off.
I agree with you, yes you might make more money investing but the risk is much higher. If you pay off your 3% mortgage quicker you are guaranteed a rate of return and low risk , but if you invest in stock market the risk is much higher and like you mentioned you could be put in a bad position when then market is down. If the market drops and you loose your job you will not be able to make mortgage payments. If I have the house paid off, I live on a very low income and still live in my home.
Excellent point, you nailed it!!! That's what I've been telling people about! It's not only the returns on investments agains mortgage savings, it's what you can invest after you finish paying off your mortgage! And peace of mind (or financial freedom) is priceless! I have only 17.5k left to pay on my mortgage of 4.5% interest and can't wait to pay it off and be able to invest even more.
The compounding effect of investing makes it far more valuable than paying off the mortgage. Also investing money is pretty liquid, the hassle of getting out equity from your house is not something I’d like to do
I'm not convinced. I continue paying my mortgage which is really small (1.3k/month, fixed 1.5%) because investing one's money in ETFs yield something like 10% in the long run. It would be stupid to give free money to the bank.
Also (you hit on this) a lot of lay offs coincide with market downturns. That needs reiterating. Paying off early is such peace of mind. That magic day came for us. I was reading books about the Great Depression. Said a mortgage was an embarrassing thing back then. Made me ponder that and then hammer on ours and now it’s gone.
Hi Bob! This is my exact scenario. My wife and I have opted to pay our mortgage off aggressively. I agree with your reasons, and have another to do so that I see is overlooked: We considered putting a lump sum into a CD for guaranteed 5% return. Further research revealed that this would be taxable income, similar to if we invested it in the stock market in a brokerage account. When compared to putting it down on the house, the return was tax-free. This ultimately led us to putting a lump sum on the house. Thanks for the video. We plan on being mortgage free by early 2025 and look forward to financial freedom. Your analysis helps us fuel our fire!
I was single at the time. I managed to save 3 months of emergency funds. 2 yrs after I moved into my house. I was diagnosed with cancer. The following year as I was going back to the hospital and doctors. To check for any remaining cancer cells. New management came in, I lost my job. Fortunately I had that money saved up. I was cleared from Doctors and was able to find another job 2 months later. I cannot stress enough about having an emergency funds. And I did get a 30 yr mortgage. Made extra payments as I could. Stopped making extra payments, when I was going through this. The mortgage was paid off in 19yrs. I was told I'm losing out in investing. But paying off the mortgage gives me a peace of mind, in case something else happens.
That extra $70k you get by not paying off your mortgage early will then be an approximate $140k 7-8 years later and over $300k after a total of 18 years.
Best down to earth financial “personal” advice yet. Yes that idea of “financial freedom” is so enticing. One thing to note; however, is in order to maximize that choice is to consider your fiscal discipline. If you pay it all off, but then find yourself blowing your extra cash at the casinos, or just buying “stuff”, was it worth it? That’s something I needed to throw into my decision, because i can get a little carried away at times
Investing 200 in stock market not always going to go up for 30 years straight. At least paying off your mortgage early you know exactly how much interest you're saving rather than have no idea how much you'll get from the $200 "invested".
We paid off our house with a 30 year loan in 10 years by making an extra principal payment each month. But my wife and I have jobs that get layed off periodically. So the freedom of having no house payment and no debt. Cars are paid off and zero credit card debt. So this way we can invest and keep our nest egg incase of hard times.
Love this video. Thanks for putting in the time to look into my specific situation: 3% mortgage and looking to be in this house for less than 4 years. In Bob we trust. Keep up the great work.
Love ❤this video. It has been in my spirit to payoff my house in 2024. I am working two jobs ( corporate and part-time retail) and working to get a third, so I can continue to triple my payment and still pay my utilities, invest and save a little too. 😊😊😊😊😊
Great video covering the non numerical factors. You don’t know what can life throw at you. Especially in your 50s. Job loss, health and wanting to escape the corporate rate race, starting by you own business. Paying off your house makes all those things easier.
You absolutely nailed it. Loss of 3% profit from investing is well worth the reduction in risk in paying off the mortgage early. ALSO, once the mortgage is paid off you can invest more once opportunities come up DURING economic turmoil. This can more than make up for the 3%. FREEDOM!!!
No it's not. It makes no sense mathematically. The only way that type of risk mitigation makes sense is if you believe there's a decent chance the money you're investing can go to zero or a number close to zero. In an S&P 500 index that's highly unlikely.
Great video! Question perhaps for next video, what if you’re single and contemplating: to just rent and invest vs buying a home and paying it off first before investing? Love to hear from you! Thank you so much
Great video! I think three other things to consider are liquidity of assets, capital gains taxes, and tax write offs. Everyone's situation is unique so they should consider what works best for them. But, I agree with what you said about the most important factor being whether or not you plan on staying in that house for an extended period of time. Cheers!
There is something to be said about paying off home early. I have a low rate, but owning house at 60 vs. 65 buys piece of mind. Thanks for showing the Excel math, "Trust but verify", and think it adds value!
Agreed with many here, not having a mortgage gives you a lot more flexibility with monthly bills, WE give a lot more to our grandkids now , we pay their private school, instead of paying a mortgage…
#1 reason is discipline. There is zero chance you will invest the money and not touch it ever. If you think you can pile up $200,000 in your investment account and your wife won’t ask you to renovate bathrooms or kitchens you are kidding yourself.
I have 1.33% mortgage rate ad I'm always advised to not pay it off because the rate is low. It's been 2 years that I'm waiting and I'm just not confortable with this debt and in taking risk investing. Thanks to you I will probably start paying off the morgage and liberate myself from it.
You know what you could do? You could calculate what your monthly mortgage would have been at 5% interest rate, and put the difference to additional principal payments.
To compare apples to apples, the second scenario can also invest the difference of the mortgage payments. That would make a big difference. So best scenario is to get a low interest, don't get a large home, pay it off early and also invest. But these days that scenario may be hard to come by.
You have less chance of loosing the house if you have that nest egg, even if the market went down. The mortgage company is more likely to offer a modification when the equity is less. Even if the market falls the nest egg could still be substantial, will be more likely get you through the tough times. Cash is king when times are difficult.
One thing you are forgetting is that a house is effectively a leveraged investment. So there is the potential to lose absolutely everything you own by putting everything into a leveraged investment. There are plenty of doom scenarios when you try to pay off the mortgage early. The 2008 crisis was a good example. If you pay off half of your mortgage when a crash happens and you lose your job you would have $0 in savings to float the payments and you'd also have $0 in actual equity in your house. Your mortgage would be under water and you'd lose everything. In the same scenario if I had investments that were not leveraged I could only lose half of them. I could still make payments on my house with that half until the market recovered. You are making the assumption that you manage to pay off your house and become unleveraged before a crash happens. That's not a guarantee. The only sure fire approach would be to have a healthy allotment of cash reserves and an emergency fund along with investments. I don't want all my eggs in one basket even if I happen to live in that basket. LOL
I currently have a 3% interest rate, my wife and I had different views on this topic because i wanted to invest the money, so instead we made an agreement to put $200 extra a month towards the mortgage, and I invest the rest. Sometimes i second guess investing the extra though because it would be nice to pay off the house and be done with it however I'm not certain we will live in this house forever. Only time will tell I guess 😊
You'll be happy when you can retire earlier or retire more comfortably and your house still gets paid off. In his scenarios he doesn't really focus on the fact that all this extra freedom is really only for the 7 years that the extra payment person paid their home off. The other guy still pays the home off 7 years later and has a significantly better retirement fund.
This is great information. I'm right in the middle as my mortgage is 5.25%. I split the difference, 1k extra to my house and 2k to my investments. But I also have the luxury of having a nearly paid off rental home that I could move into in the worst case scenario.
There are obviously Pros and cons of of both option but overpaying mortgage seem still higher risk to me. Assuming that someone have 6 months emergency fund and no debt other than mortgage, pumping all the money in mortgage does carry many risks one of which is that money are not as liquid as index fund investment(granted that when economy is not doing well its better not to use investments anyways - but thats what emergency fund is for). Overpaying say £200 per month on 30 year mortgage is locking this money in house equity and does not contribute to our ongoing finances and if really big crisis happens jn our lifes we have no way to use this money other than to borrow it back at whatever interest rate is available at a time. It seems less risky to invest is well diversified index fund or even high yield savings account so that we have more options- one of which is jsing our portfolio to pay off mortgage. But also if stock market is doing well but we have lost our job and are in a pickle, seling some of jt js a tangable options as opposed to money locked in a mortgage
Housing Market prices will likey be higher in 20 years so your equity will inevitably double. Plus after shaving off years & saving on interest $$ it’s a good idea I do both 50/50. On the home principle & on investment Wanna be well rounded Nice vid👍🏻👍🏻
I have a 3.25% mortgage. I like the idea of paying it off in ten years and then going full force into investing when I turn 55 years old. I have $200K in 401k now (at 46 yrs old) so I feel I can let that ride making 12% on that, I made 24% on my 401 last year, while I point all of my funds to my mortgage.
His whole calculation is based on a market return of slightly under 7%. So obviously paying 7.18% mortgage is better. But 7% is a conservative return AFTER inflation. But your mortgage doesn't go up with inflation, so you should compare to market returns before adjusting for inflation. Ie 10% conservatively. If you're basing your decision on this video, it's a mistake.
Something that is ignored here is if your company has matching 401K contributions and you don’t contribute enough to get them because you’re trying to pay down your mortgage, you’re losing out on 100% return on the match. Also for some, more 401K contributions may drop you into a lower tax bracket that could save you an additional 2% + on fed taxes.
You've got good points. Folks with sub 100k home and a proper 6 month emergency fund. Huge long term difference. Amount of interest saved at 3% is far less. I prefer doing both paying extra and investing more.
Great video. I'm working on building up my emergency fund, currently in a home purchased in 2015 with a 30 year 3.75% fixed rate. Divorced at the end of 2022, Ex didn't want the house (too much upkeep, prefers the condo life when she's faced with doing the maintenance and work). Not my dream house, doesn't fit my needs anymore. 1 daughter, she lives with me half the time, and a dog. In a 4 bedroom house with no garage. I can easily drop a bedroom (possibly 2, but I want an office space for work), add a garage. Tricky parts are staying in the same school district for our grade schooler and the current mortgage rates. The area I'm in has had about 6 homes for sale over the same months, and they are typically larger and more expensive than I need or can afford. Leaves me with staying put, after I build up my 5-6 month fund, am I going to push hard to pay down the mortgage, invest, set aside more for a down payment on a new home for years from now when an opportunity arises. After my girl leaves grade 5 (2nd currently) and goes to middle school, I won't be as limited by address, opens up half the town we live in vs 1/5th for grade school. Your final thoughts on when you wouldn't pay off a mortgage early resonates with me. For what it's worth, I was paying down the premium prior to the divorce when I had the money and shaved about 4 years off.
A homestead is a liability. Sure, you have equity, and it will likely appreciate in value. But you also have upkeep, insurance, misc fees, taxes and a civil liability if anything happens to anyone there. You could sell it to access the equity but now you need a place to live so that money goes right into another homestead, and the same market that gave you a "profit" takes it right back because every house went up in value, not just yours. It's a financial placekeeper, a bookmark. Plus, it could take months or years to access that equity. I'll take a paid off homestead over an equivalent brokerage account any day of the week because I will always need a place to live. Without a house to pay for, I'm free to invest much more and take greater risks and I can bequeath a free and clear home to my survivors which is much easier to responsibly manage than a complicated mix of financial investments they likely won't understand at the level I do.
Thanks, seems that it makes no sense to pay it off. Too many risks. When your house is paid out it would be really tempting to get a bigger one and pay a bit again.
Mortgages last for 30 years. Market downturns don't tend to last that long… If you're invested in the S&P 500 (a broad market fund, not a specific stock) it's unlikely that the value of the funds won't recover in time. (The average bear market lasts 289 days, or around 9.5 months.) I feel much better with money invested (earning better than 10% over the past 10 years), and paying my 3% mortgage as I go. I like having money I can get to without taking out a loan against my home equity.
This is the first time I've ever agreed with a financial CZcams video. Zero debt is the best feeling in life.... Your 3% mortgage is guaranteed to be there 30 years,... You know what's not guaranteed? Your ability to outperform it....
Something to consider is that since you need less money to live on without a mortgage, you can put that money into a tax advantages account to lower your overall taxes while working. Additionally, the investments can also be taxed depending on how its invested and sold.
Great video. The thing the "always invest" crew don't seem to appreciate is that 10% returns are not guaranteed. But repaying your mortgage is guaranteed. And there is a massive power to being repaid. YOU own it. Massively motivational.
People seem to fixate on the interest attached to your mortgage payment they forget about the amount of money that you've borrowed which is the true consideration to take into account. 3% 5% 7% they don't sound like alot but when you tie that against four five six hundred thousand dollars, it's quite significant. The interest that you will pay over the 25 year amortization is almost double the loan amount
Save your money in high yield muni bonds until you have enough money to use as a down payment on your next home and at a level where you could rent the next home at a profit. This is the safety factor. Live in the 2nd home. Rent out the first home and the renter will end up paying that home off for you using your same logic. When the first home is paid off, apply the rent payments to your second home to pay it off even faster. Or even better save once again to buy a third home with the same scenario, wash , rinse and repeat until you can buy homes - all cash. You will have multiple rentals with other people paying them down for you and paying for the home you live in. THAT is what leads to sound sleep! Your welcome!
My house is paid off and the emotional benefits are priceless. I’m a parent of 2 young kids-and you can’t replace the security a paid off house brings.
He talks about the situation where you get laid off from your job but it’s still better to pay off a 3% mortgage. The problem is until that mortgage is paid off you still have make payments and your money is tied up in the house with no way to access it without selling it . Can’t get a home equity loan without a job or source of income. You be actually much worse off tying up your extra money into paying down a 3% mortgage if you lost your job or income. Because you would have no liquid funds to tap into such as your brokerage account to pay your mortgage payments.
The "answer" was, is and always will be, "it depends". But then the video would only be about 20 seconds long. It will forever remain bizarre the cult of pro-mortgage payers and their endless need to insist their way is best and base their justification for their choices on how well they sleep at night, as if everyone has same constitution and risk tolerance..
This issue with this is you’re stopping at the mortgage. Once the mortgage is paid off, life doesn’t end, hopefully. Your home will only appreciate so much 3-4%. Your investments don’t have a term where they stop making gains. Meaning, the net worth gains from paying down debt have a definitive endpoint. Your investment will grow throughout your life into retirement and even after death if you set it up that way. In both scenarios, you live in the house and can afford it comfortably, which is what matters most. The investment strategy ensures your retirement is good and gives you options to sell the house and downsize if need be. I’d rather have the value of the house in VOO and keep paying the mortgage while my investments grow decades past the 30yr mortgage…
What rate of return are you assuming on your investments? There is also the benefit of flexibility, which does not come if you’ve given all your money to the bank. If you have an unexpected emergency or someone in your family gets sick etc. you can pull money from the investments, but you can’t take it back from the bank at 3% it’s a no-brainer to invest. you can earn more than that after tax
I'm in the save boat with 3.3%. Investing is nice, however using that to pay off the mortgage isn't great when capital gains tax kicks and it will end up being a wash. My strategy is to save 25k plus emergency funds in a high yield savings 4.25% and then putting in 25k a year into the mortgage in a lump sum.
Another way to look at it is if you Invest instead of pay extra for 23 years, 200/month invest for 23 years @ 8% is $146,143. Your remaining mortgage balance is $133,876 (the 7% interest scenario). Meaning you can write a check, payoff your house just as fast and have a head start on "the last 7 years" by $12,267, ending with a portfolio total of $260,000 instead of $239,000. House is paid off at the same time. The "benefit" of investing your extra payment (other than a bit more money at the end) is the increased cash on hand if some unforeseen disaster happens, that would disrupt your plans in either scenario.
@@briggturner4615 very little turnover (tax) on holding a s&p 500 index fund. Once you can write a check to pay off your house you won't. You gain no better sleep and you see you are earning higher returns (as equity returns 0)
#freedom I appreciate the perspective. I have a 2.625% mortgage and I never really considered paying it off early because of how advantageous it seems. Your breakdown really makes me think some of the strategy over. Things to considers that would actually make the calculation even more competitive would be assuming you make the same amount of money regardless if your interest rate is 7% or 3%. The person with a 3% interest would have over $600 more a month to invest due to difference in the mortgage payment. Also, it would be nice to consider a breakdown regarding possible tax implications due to mortgage interest being a write off.
That's a good point on the extra money associated with a lower interest rate! As far as tax benefits for mortgage interest write-off, it turns out most people don't even benefit with that write-off ever since the standard deduction went up so high in 2017. Details on that piece in this video: czcams.com/video/5WaeQsid6yY/video.html
#freedom ur $5 a day series got me into your videos and I started investing $15 a day a few months ago and now I have $2500 in a brokerage account and I’m up over 8% keep up the work
Thank you, I'm buying my second house right now. And this videos helps a lot and gives me ideas. I got the interest at 5.89 for 15 year. Gonna try to pay it fast 6 years or faster
Great video, very helpful! Additional things to consider would be potential write off of interest on your taxes. That's going down a whole different path. But, appreciate your efforts in putting this educational video together!
The number one reason to paying a mortgage off after 1/3 of the way through is reducing the banks risk. Losing a job will be regardless. Save to pay the house off and do it in one payment when it’s time. If that time never comes, then keep investing. Even if the stock market tanks when there’s enough diversity it’s not a problem.
We are doing both. The goal is to have it paid off before age 60 so we pay a little extra each month to accomplish this goal. That said, having it paid off even sooner would give us more flexibility, which is just as important. At some point we plan to move. Even if interest rates go down by then, I don't see them going as low as before. So if we sell our home and buy a similar value home in a new location, it would be better to have a low or no mortgage. Its faster to pay off a mortgage that has a lower interest rate. I have to keep reminding myself that I didn't take out a mortgage because I wanted to invest money. I took it out because I didn't have the money to pay for a house up front. It would be different if I took out the loan and put that money in the market because I'd also be making money on that money.
Debt makes me anxious. I'm less focused because of that. Stress makes your health worse. Those two things cost you money. Lots of money. What people can do is both. Pay mortage and invest. At first focus on paying mortage, with just small % put for the investing. Over the time when your income grows and your debt is getting smaller change the ratio. Economically not the best. But it gives you some freedom, some security, and some profit.
we are investing for two more years, vs a lower mortgage rate. After that we should have enough to pay off the mortgage - but we might not. We might stop paying the mortgage from our salary, and pay it from the invesment via drawdown. We have enough for the investment to pay the rest of the mortage term and while the investment is earning more than the mortgage rate, it’ll grow a little vs using the lump sum to pay off immediately. So at the end we’d have more money - but we have effectively the same ‘paid off’ peace of mind
@@mstelzman interestingly most people no longer benefit on that deduction. Details here: Avoid This Common Mortgage Interest Deduction Mistake czcams.com/video/5WaeQsid6yY/video.html
What about a high yield savings account? With yields currently over 5%. Wouldn't it make sense to put your extra into a savings account? And when interest rates drop, you could take the extra w/ earnings and drop it on the mortgage. Risk free?
First part of the video is great. I would argue the fact of the economic turmoil. If you’re constantly investing and it goes down 30/40/50% and you lose your job. Most will get a job right after or unemployment second with even 1 year or 7 years 50% down in the stocks will allow you to even dollar cost average out a portion or personal finance for many many years you have emergency funds maybe spouse help. Let’s say it’s so bad economically well my prediction is I’m probably not worried about paying anything I’m probably worried for my safety and survival. I believe we learned a lot from that recession and I do not think we will get back to that in the “near future”
Please compare paying off mortgage early in the 1970s/early 80s and adjust for inflation. Take the same equation and plug it into the 1930s and adjust for inflation. Did inflation/deflation make a difference? Is it smart to pay off the mortgage early in both decades?
I'm in that boat now. I have a 3% mortgage that I plan to pay off early however, I'm fortunate enough where I don't have to stop investing. I have enough income to do both.
You should be paying $400 a month extra since your monthly mortgage is lower due to the 3% interest rate instead of the 7% so that means you will pay your mortgage even faster than 7 years
Yes, freedom financially is fantastic. Paying the house off is a guaranteed benefit. Investments are not guaranteed. You can lose your investment but not a paid off house.
My husband and I are in this exact position. I want to pay off the house and he wants to invest. We are stable enough to go the investment route, but I like the idea of the peace of mind
No tax deduction paying it off you can get 5% interest ln something like a capital one savings account but it’s compound interest so it builds exponentially.
What are your thoughts on putting the money into a HYSA at 5% until rates change and then taking that money out and putting it all on the 3.125% mortgage at that time?
Shouldn’t one also consider discounting future cash flow (in and out) in this comparison. Assuming a 30 year loan, in 20 years (approx) the inflation adjusted loan payment will cost the debtor about 1/2 as much as the first payment. Future payments cost the debtor less.
One thing you missed in your comparison is that mortgage insurance is deductible on your taxes. That can make a very big difference to a lot of people, depending on your tax situation. That doesn't change the desire to be debt free, but for those of us that do the math and have OCD... yeah, I'll keep the mortgage. I can always pay the mortgage off with my investments if I want to.
I actually don’t use mortgage interest because for a great majority of people in United States - they actually aren’t getting a deduction anymore due to the higher standard deduction limits since 2017.
See Part 1 of this Video Series (the original video): czcams.com/video/CNS_JMAo8aU/video.html
Also, carrying a mortgage for a "tax break" may not be benefiting you anymore. See this video on why: czcams.com/video/5WaeQsid6yY/video.html
It benefits me, depends on your tax liability and if you have enough write offs to exceed your standard deduction. Just saying you should have mentioned that in the comparison here.
What you said in the 2nd half of the video is exactly why I paid off my 3.5% mortgage early. It might not "make sense mathematically" to some people, but you can't put a price on freedom. Taking a 20% pay cut and only working 32 hours per week is balanced by not having a mortgage payment. Having a 3 day weekend EVERY WEEKEND is nice. Spending more time with the family, and working around the house on Friday instead of working for someone else on Friday is priceless.
That is amazing and that you can now enjoy those 3 day weekends. Love it!!!
It makes perfect sense mathematically. Everybody else is doing the math wrong. They're simply looking at the spread on the interest rate. What they're not factoring into that analysis is risk. They did not adjust for risk. Once you make a mathematical adjustment for risk, the math adds up.
@@inertiaforce7846can you elaborate on this? This is a great addition to the conversation
@inertiaforce7846 how could one verify what your saying? Idk how to add risk to the math..
Why couldn't you do all those things knowing you had a huge pile of money in the market? You know just because you choose not to put that money into paying off your mortgage early doesn't mean that money just disappears right?
Paid off my 2.75% mortgage. My sleep quality has been GLORIOUS
You could have just burned the money to stay warm at night and had the same effect.
6.5% rate on a 15 yr here- trying to pay off in 5 to 7 years. People don’t talk about the fact that the $ you earn investing is going to be taxed. Whereas the $ saved on mortgage interest is risk free and tax free.
Depends where it’s invested. If that difference is being invested into a Roth IRA or a Roth contribution of your 401k, you won’t be taxed. Those would be the same post tax dollars you’d be using to pay off the home early. Regardless, I’m still team pay off mortgage early, but just something you should consider.
Your scenario with a 6.5% mortgage has little to do with the video's scenario with a 3% mortgage. 3% mortgage interest is less than current inflation. There's no current math situation where it makes sense to pay off a debt that costs less than inflation over investing. Heck you don't even have to invest. High yield savings accounts are paying 5% right now.
And the only thing that's taxed are dividends. Long term cap gains are also taxed when you take money out or may be negligible depending on your situation.
And last...depending on the mortgage you can reduce the cost of the mortgage when filing your taxes by itemizing.
exactly - risk free and tax free
Mortgage payments are tax deductible, so if we were to use the tax argument, the money saved in taxes from keeping the mortgage longer is better than paying the 10% taxes on the capital gains in 30 years.
Financially the money you "saved" from interest is much less than the capital gains from investing that overpayment, in almost every scenario where the mortgage rate is less than 8%.
@@rebeltheharem7028 Debt makes me anxious. I'm less focused because of that. Stress makes your health worse. Those two things cost you money. Lots of money.
What people can do is both. Pay mortage and invest. At first focus on paying mortage, with just small % put for the investing. Over the time when your income grows and your debt is getting smaller change the ratio.
Economically not the best. But it gives you some freedom, some security, and some profit.
I just sleep better in a house that's paid off. Just call it sleep tax. It's worth it to me, even if I'm missing out on some investment growth.
I'm all about the sleep tax!
What you are failing to consider is if you are paying the 200 dollars to your mortgage and economic turmoil occurs before your house is paid off. You no longer have any money to make your house payment and you have put all this equity into your home that the bank can now foreclose on. So you now have nothing.
In the situation of investing the 200 you at least potentially have money to live on and could sell your house before the bank forecloses.
Right, you're still paying your monthly payment for 23 years. You put extra money on your principal but your payment stays the same. Economic turmoil happens at the 15 year mark you still have the full payment to make.
Totally agree, not a lot you can do when money is tied up in equity.
Agreed. Paying down the mortgage is an unrealized gain until you either sell the place, or it's paid off completely. If you lose your job in the meantime, you can't eat the equity in your house.
I paid off my 2.875% mortgage early. Yes, mathematically speaking, I *could* have made more in total returns with investing; but a major part was creating more security and greatly reducing my risk profile.
Now having had no mortgage for a few years, my investing was able to be a singular focus, with the worry of market corrections. The psychological boost of no mortgage is something money cannot buy...
Glad to hear your success and congrats on financial freedom! I’m in a 2.75% mortgage with roughly 85k remaining to save for payoff. Should have it accomplished by mid next year.
Bonus: If the market takes a dump you can invest serious cash while it's down and take advantage of the bounce back.
@@hobbes1069 that's the idea! With no mortgage, consistent investing coupled with a decent stock pile of cash (for buying opportunities), gives you so much flexibility
The feeling of paying it off is unparalleled. Paid a 30 yr mortgage in 6 years .
Can’t tell you how happy and thankful I am we haven’t paid off any of our mortgages early. Thanks to low interest mortgages and the power of compounding investments at a rate much higher than 2.75%, we became multi-millionaires and financially independent in our early 40s. Much faster and much more securely than we would have if we’d been aggressively paying down those notes instead.
Said people in 2008 when they get their houses foreclosed…
@@michalstelmach4203 The people who got their houses foreclosed on didn’t have the finances to start with to afford those mortgages. Biggest financial fraud the world has ever seen.
All fake money when in the market with both feet
Paid off the mortgage with returns from holding quality assets. Everything now is a bonus!
Awesome!!
Most of my lifetime financial goals were hit in 2023! My portfolio is quite diversified to withstand market volatility n optimize returns.
Hi Jason, the market is at all time highs. Do you think there will be a recession soon or a downturn anytime soon?
Remember that you pay tax on investment earnings. You don't pay tax on interest saved by paying off early (or by having an offset / redraw account). So another reason to hit the mortgage hard.
I did a little bit of both. Decided on biweekly payments and invested. After 10 years I had enough invested to pay off the mortgage. Maybe not the best financial decision, but I sleep great at night not having a mortgage and now supercharging investing. Good video 🤘
That's a good idea - congrats on that approach!!
Another idea.... Pay a substantial amount down on your mortgage, and do a "Recast". This would lower your payment, as much as, substantially. The payment is low enough to be handled in the case of job loss or illness. The extra saved each month can be DCA'd into your favorite investments. Just another "what if"...... Thanks for your videos, Bob!
A few points to add with a paid off mortgage: 1) your emergency fund you need is much less, because you have no mortgage. 2) You become a much more stable investor because your aren't concerned about the market dropping because you don't need the money except for retirement. 3) You have less stress, which takes something off you mind, which helps you in many different ways including helping you focus better at your job....personally I got a promotion since my mortgage was paid off.
I agree with you, yes you might make more money investing but the risk is much higher. If you pay off your 3% mortgage quicker you are guaranteed a rate of return and low risk , but if you invest in stock market the risk is much higher and like you mentioned you could be put in a bad position when then market is down. If the market drops and you loose your job you will not be able to make mortgage payments. If I have the house paid off, I live on a very low income and still live in my home.
Excellent point, you nailed it!!! That's what I've been telling people about! It's not only the returns on investments agains mortgage savings, it's what you can invest after you finish paying off your mortgage! And peace of mind (or financial freedom) is priceless! I have only 17.5k left to pay on my mortgage of 4.5% interest and can't wait to pay it off and be able to invest even more.
Well said.
The compounding effect of investing makes it far more valuable than paying off the mortgage. Also investing money is pretty liquid, the hassle of getting out equity from your house is not something I’d like to do
I'm not convinced. I continue paying my mortgage which is really small (1.3k/month, fixed 1.5%) because investing one's money in ETFs yield something like 10% in the long run. It would be stupid to give free money to the bank.
1.5%?! That's crazy good
Low interest rate case is explained at the end of the video…
It always depends, 10% of 100 usd is very little. Where as 1% of a million dollar house is too much.
Also (you hit on this) a lot of lay offs coincide with market downturns. That needs reiterating. Paying off early is such peace of mind. That magic day came for us. I was reading books about the Great Depression. Said a mortgage was an embarrassing thing back then. Made me ponder that and then hammer on ours and now it’s gone.
Hi Bob! This is my exact scenario. My wife and I have opted to pay our mortgage off aggressively. I agree with your reasons, and have another to do so that I see is overlooked:
We considered putting a lump sum into a CD for guaranteed 5% return. Further research revealed that this would be taxable income, similar to if we invested it in the stock market in a brokerage account. When compared to putting it down on the house, the return was tax-free. This ultimately led us to putting a lump sum on the house.
Thanks for the video. We plan on being mortgage free by early 2025 and look forward to financial freedom. Your analysis helps us fuel our fire!
I was single at the time. I managed to save 3 months of emergency funds. 2 yrs after I moved into my house. I was diagnosed with cancer. The following year as I was going back to the hospital and doctors. To check for any remaining cancer cells. New management came in, I lost my job. Fortunately I had that money saved up. I was cleared from Doctors and was able to find another job 2 months later. I cannot stress enough about having an emergency funds. And I did get a 30 yr mortgage. Made extra payments as I could. Stopped making extra payments, when I was going through this. The mortgage was paid off in 19yrs. I was told I'm losing out in investing. But paying off the mortgage gives me a peace of mind, in case something else happens.
U did well. If u keep the mortgage and invest , u are throwing away interest to the lender on the house. It is a wash. Now u have peace of mind.
How fast would u need to pay off a 3% loan to beat investing
Forget the house you beat cancer. Amazing.
@@gamingduology4757good question. Prolly takes calculus or somethin to solve
Also important to consider capital gains taxes. A 7 percent return in the market is not truly 7 percent it is less because of capital gains taxes.
That extra $70k you get by not paying off your mortgage early will then be an approximate $140k 7-8 years later and over $300k after a total of 18 years.
And it's more liquid than the equity in your house.
@@brocklastname6682as long as you don’t go buy a Ferrari
Best down to earth financial “personal” advice yet. Yes that idea of “financial freedom” is so enticing. One thing to note; however, is in order to maximize that choice is to consider your fiscal discipline. If you pay it all off, but then find yourself blowing your extra cash at the casinos, or just buying “stuff”, was it worth it? That’s something I needed to throw into my decision, because i can get a little carried away at times
I'm paying the mortgage off, man. Idc about an extra 100k. The freedom of not having to worry about my family being homeless is priceless
Investing 200 in stock market not always going to go up for 30 years straight. At least paying off your mortgage early you know exactly how much interest you're saving rather than have no idea how much you'll get from the $200 "invested".
We paid off our house with a 30 year loan in 10 years by making an extra principal payment each month. But my wife and I have jobs that get layed off periodically. So the freedom of having no house payment and no debt. Cars are paid off and zero credit card debt. So this way we can invest and keep our nest egg incase of hard times.
Def the way to be. Your lucky to have a responsible partenr in crime also. The wife can be the wild card.
Love this video. Thanks for putting in the time to look into my specific situation: 3% mortgage and looking to be in this house for less than 4 years. In Bob we trust. Keep up the great work.
Love ❤this video. It has been in my spirit to payoff my house in 2024. I am working two jobs ( corporate and part-time retail) and working to get a third, so I can continue to triple my payment and still pay my utilities, invest and save a little too. 😊😊😊😊😊
Great video covering the non numerical factors. You don’t know what can life throw at you. Especially in your 50s. Job loss, health and wanting to escape the corporate rate race, starting by you own business. Paying off your house makes all those things easier.
You absolutely nailed it. Loss of 3% profit from investing is well worth the reduction in risk in paying off the mortgage early. ALSO, once the mortgage is paid off you can invest more once opportunities come up DURING economic turmoil. This can more than make up for the 3%. FREEDOM!!!
Great point, that 3% can easily be made up. Onward and upward to FREEDOM!!
Doesn’t paying off mortgage early just put way too much of portfolio into a single investment?
@@Mike604poker Not if it's your primary residence. The risk aversion 7+ years early outweighs any housing value dips within that timeframe.
Bingo. What you said a lot of people don't understand for some reason. They keep focusing on the low interest rate only.
No it's not. It makes no sense mathematically. The only way that type of risk mitigation makes sense is if you believe there's a decent chance the money you're investing can go to zero or a number close to zero. In an S&P 500 index that's highly unlikely.
I just paid my mortgage off (did it in 15 yrs) So glad I did.
Great video! Question perhaps for next video, what if you’re single and contemplating: to just rent and invest vs buying a home and paying it off first before investing? Love to hear from you! Thank you so much
Great video! I think three other things to consider are liquidity of assets, capital gains taxes, and tax write offs. Everyone's situation is unique so they should consider what works best for them. But, I agree with what you said about the most important factor being whether or not you plan on staying in that house for an extended period of time. Cheers!
There is something to be said about paying off home early. I have a low rate, but owning house at 60 vs. 65 buys piece of mind. Thanks for showing the Excel math, "Trust but verify", and think it adds value!
Can’t use my paid off mortgage as an investment. Invest the money instead is so much better.
Agreed with many here, not having a mortgage gives you a lot more flexibility with monthly bills, WE give a lot more to our grandkids now , we pay their private school, instead of paying a mortgage…
#1 reason is discipline.
There is zero chance you will invest the money and not touch it ever.
If you think you can pile up $200,000 in your investment account and your wife won’t ask you to renovate bathrooms or kitchens you are kidding yourself.
You also have to account for taxes, home value appreciation, and uncertainty in the stock market. I would hedge my bets and put $100 in both options.
That's a good point!
I have 1.33% mortgage rate ad I'm always advised to not pay it off because the rate is low. It's been 2 years that I'm waiting and I'm just not confortable with this debt and in taking risk investing.
Thanks to you I will probably start paying off the morgage and liberate myself from it.
You know what you could do? You could calculate what your monthly mortgage would have been at 5% interest rate, and put the difference to additional principal payments.
To compare apples to apples, the second scenario can also invest the difference of the mortgage payments. That would make a big difference. So best scenario is to get a low interest, don't get a large home, pay it off early and also invest. But these days that scenario may be hard to come by.
Insurance becomes more optional once you own the house outright.
You have less chance of loosing the house if you have that nest egg, even if the market went down. The mortgage company is more likely to offer a modification when the equity is less. Even if the market falls the nest egg could still be substantial, will be more likely get you through the tough times. Cash is king when times are difficult.
One thing you are forgetting is that a house is effectively a leveraged investment. So there is the potential to lose absolutely everything you own by putting everything into a leveraged investment. There are plenty of doom scenarios when you try to pay off the mortgage early. The 2008 crisis was a good example. If you pay off half of your mortgage when a crash happens and you lose your job you would have $0 in savings to float the payments and you'd also have $0 in actual equity in your house. Your mortgage would be under water and you'd lose everything. In the same scenario if I had investments that were not leveraged I could only lose half of them. I could still make payments on my house with that half until the market recovered. You are making the assumption that you manage to pay off your house and become unleveraged before a crash happens. That's not a guarantee. The only sure fire approach would be to have a healthy allotment of cash reserves and an emergency fund along with investments. I don't want all my eggs in one basket even if I happen to live in that basket. LOL
I have started my mortgage free journey. My first payment of $3000 is 2.5X my monthly mortgage. I want to save interest and keep my $$$
I currently have a 3% interest rate, my wife and I had different views on this topic because i wanted to invest the money, so instead we made an agreement to put $200 extra a month towards the mortgage, and I invest the rest. Sometimes i second guess investing the extra though because it would be nice to pay off the house and be done with it however I'm not certain we will live in this house forever. Only time will tell I guess 😊
You'll be happy when you can retire earlier or retire more comfortably and your house still gets paid off.
In his scenarios he doesn't really focus on the fact that all this extra freedom is really only for the 7 years that the extra payment person paid their home off. The other guy still pays the home off 7 years later and has a significantly better retirement fund.
Good points, in the past I used to think invest, but these days I am agreeing with you, the personal freedom and security is more important than
This is great information. I'm right in the middle as my mortgage is 5.25%. I split the difference, 1k extra to my house and 2k to my investments. But I also have the luxury of having a nearly paid off rental home that I could move into in the worst case scenario.
There are obviously Pros and cons of of both option but overpaying mortgage seem still higher risk to me. Assuming that someone have 6 months emergency fund and no debt other than mortgage, pumping all the money in mortgage does carry many risks one of which is that money are not as liquid as index fund investment(granted that when economy is not doing well its better not to use investments anyways - but thats what emergency fund is for). Overpaying say £200 per month on 30 year mortgage is locking this money in house equity and does not contribute to our ongoing finances and if really big crisis happens jn our lifes we have no way to use this money other than to borrow it back at whatever interest rate is available at a time. It seems less risky to invest is well diversified index fund or even high yield savings account so that we have more options- one of which is jsing our portfolio to pay off mortgage. But also if stock market is doing well but we have lost our job and are in a pickle, seling some of jt js a tangable options as opposed to money locked in a mortgage
Housing Market prices will likey be higher in 20 years so your equity will inevitably double. Plus after shaving off years & saving on interest $$ it’s a good idea
I do both 50/50. On the home principle & on investment
Wanna be well rounded
Nice vid👍🏻👍🏻
Great points!!
I have a 3.25% mortgage. I like the idea of paying it off in ten years and then going full force into investing when I turn 55 years old. I have $200K in 401k now (at 46 yrs old) so I feel I can let that ride making 12% on that, I made 24% on my 401 last year, while I point all of my funds to my mortgage.
55 is too late. You lose 10 years of compounding.
His whole calculation is based on a market return of slightly under 7%.
So obviously paying 7.18% mortgage is better. But 7% is a conservative return AFTER inflation. But your mortgage doesn't go up with inflation, so you should compare to market returns before adjusting for inflation. Ie 10% conservatively.
If you're basing your decision on this video, it's a mistake.
Something that is ignored here is if your company has matching 401K contributions and you don’t contribute enough to get them because you’re trying to pay down your mortgage, you’re losing out on 100% return on the match. Also for some, more 401K contributions may drop you into a lower tax bracket that could save you an additional 2% + on fed taxes.
You've got good points. Folks with sub 100k home and a proper 6 month emergency fund. Huge long term difference. Amount of interest saved at 3% is far less. I prefer doing both paying extra and investing more.
Agreed. Especially now when you can earn 5%+ on your emergency fund without taking risk.
You earned my subscription with this video.
Great video. I'm working on building up my emergency fund, currently in a home purchased in 2015 with a 30 year 3.75% fixed rate. Divorced at the end of 2022, Ex didn't want the house (too much upkeep, prefers the condo life when she's faced with doing the maintenance and work). Not my dream house, doesn't fit my needs anymore. 1 daughter, she lives with me half the time, and a dog. In a 4 bedroom house with no garage. I can easily drop a bedroom (possibly 2, but I want an office space for work), add a garage. Tricky parts are staying in the same school district for our grade schooler and the current mortgage rates. The area I'm in has had about 6 homes for sale over the same months, and they are typically larger and more expensive than I need or can afford.
Leaves me with staying put, after I build up my 5-6 month fund, am I going to push hard to pay down the mortgage, invest, set aside more for a down payment on a new home for years from now when an opportunity arises. After my girl leaves grade 5 (2nd currently) and goes to middle school, I won't be as limited by address, opens up half the town we live in vs 1/5th for grade school. Your final thoughts on when you wouldn't pay off a mortgage early resonates with me. For what it's worth, I was paying down the premium prior to the divorce when I had the money and shaved about 4 years off.
A homestead is a liability. Sure, you have equity, and it will likely appreciate in value. But you also have upkeep, insurance, misc fees, taxes and a civil liability if anything happens to anyone there. You could sell it to access the equity but now you need a place to live so that money goes right into another homestead, and the same market that gave you a "profit" takes it right back because every house went up in value, not just yours. It's a financial placekeeper, a bookmark. Plus, it could take months or years to access that equity. I'll take a paid off homestead over an equivalent brokerage account any day of the week because I will always need a place to live. Without a house to pay for, I'm free to invest much more and take greater risks and I can bequeath a free and clear home to my survivors which is much easier to responsibly manage than a complicated mix of financial investments they likely won't understand at the level I do.
Thanks, seems that it makes no sense to pay it off. Too many risks. When your house is paid out it would be really tempting to get a bigger one and pay a bit again.
Mortgages last for 30 years. Market downturns don't tend to last that long… If you're invested in the S&P 500 (a broad market fund, not a specific stock) it's unlikely that the value of the funds won't recover in time. (The average bear market lasts 289 days, or around 9.5 months.) I feel much better with money invested (earning better than 10% over the past 10 years), and paying my 3% mortgage as I go. I like having money I can get to without taking out a loan against my home equity.
This is the first time I've ever agreed with a financial CZcams video.
Zero debt is the best feeling in life....
Your 3% mortgage is guaranteed to be there 30 years,...
You know what's not guaranteed?
Your ability to outperform it....
Something to consider is that since you need less money to live on without a mortgage, you can put that money into a tax advantages account to lower your overall taxes while working. Additionally, the investments can also be taxed depending on how its invested and sold.
Great video. The thing the "always invest" crew don't seem to appreciate is that 10% returns are not guaranteed. But repaying your mortgage is guaranteed. And there is a massive power to being repaid. YOU own it. Massively motivational.
People seem to fixate on the interest attached to your mortgage payment they forget about the amount of money that you've borrowed which is the true consideration to take into account. 3% 5% 7% they don't sound like alot but when you tie that against four five six hundred thousand dollars, it's quite significant. The interest that you will pay over the 25 year amortization is almost double the loan amount
Save your money in high yield muni bonds until you have enough money to use as a down payment on your next home and at a level where you could rent the next home at a profit. This is the safety factor. Live in the 2nd home. Rent out the first home and the renter will end up paying that home off for you using your same logic. When the first home is paid off, apply the rent payments to your second home to pay it off even faster. Or even better save once again to buy a third home with the same scenario, wash , rinse and repeat until you can buy homes - all cash. You will have multiple rentals with other people paying them down for you and paying for the home you live in. THAT is what leads to sound sleep! Your welcome!
My house is paid off and the emotional benefits are priceless. I’m a parent of 2 young kids-and you can’t replace the security a paid off house brings.
He talks about the situation where you get laid off from your job but it’s still better to pay off a 3% mortgage.
The problem is until that mortgage is paid off you still have make payments and your money is tied up in the house with no way to access it without selling it . Can’t get a home equity loan without a job or source of income.
You be actually much worse off tying up your extra money into paying down a 3% mortgage if you lost your job or income. Because you would have no liquid funds to tap into such as your brokerage account to pay your mortgage payments.
The "answer" was, is and always will be, "it depends". But then the video would only be about 20 seconds long. It will forever remain bizarre the cult of pro-mortgage payers and their endless need to insist their way is best and base their justification for their choices on how well they sleep at night, as if everyone has same constitution and risk tolerance..
This issue with this is you’re stopping at the mortgage. Once the mortgage is paid off, life doesn’t end, hopefully. Your home will only appreciate so much 3-4%. Your investments don’t have a term where they stop making gains. Meaning, the net worth gains from paying down debt have a definitive endpoint. Your investment will grow throughout your life into retirement and even after death if you set it up that way. In both scenarios, you live in the house and can afford it comfortably, which is what matters most. The investment strategy ensures your retirement is good and gives you options to sell the house and downsize if need be. I’d rather have the value of the house in VOO and keep paying the mortgage while my investments grow decades past the 30yr mortgage…
What rate of return are you assuming on your investments?
There is also the benefit of flexibility, which does not come if you’ve given all your money to the bank. If you have an unexpected emergency or someone in your family gets sick etc. you can pull money from the investments, but you can’t take it back from the bank at 3% it’s a no-brainer to invest. you can earn more than that after tax
This was just brilliant. Math doesn’t lie.
I'm in the save boat with 3.3%. Investing is nice, however using that to pay off the mortgage isn't great when capital gains tax kicks and it will end up being a wash. My strategy is to save 25k plus emergency funds in a high yield savings 4.25% and then putting in 25k a year into the mortgage in a lump sum.
Paying down my 2.875% mortgage, knocked over 6 years off the life of the mortgage in 3 years. Every COLA we add another $10
Another way to look at it is if you Invest instead of pay extra for 23 years, 200/month invest for 23 years @ 8% is $146,143. Your remaining mortgage balance is $133,876 (the 7% interest scenario). Meaning you can write a check, payoff your house just as fast and have a head start on "the last 7 years" by $12,267, ending with a portfolio total of $260,000 instead of $239,000. House is paid off at the same time.
The "benefit" of investing your extra payment (other than a bit more money at the end) is the increased cash on hand if some unforeseen disaster happens, that would disrupt your plans in either scenario.
Unfortunately you've got to pay taxes on your investments. Knock off about 20%.
@@briggturner4615 very little turnover (tax) on holding a s&p 500 index fund. Once you can write a check to pay off your house you won't. You gain no better sleep and you see you are earning higher returns (as equity returns 0)
Bottom line the bank owns your home until it’s paid off. Derisk your personal life. Your business or even working for someone has plenty of risk
#freedom I appreciate the perspective. I have a 2.625% mortgage and I never really considered paying it off early because of how advantageous it seems. Your breakdown really makes me think some of the strategy over. Things to considers that would actually make the calculation even more competitive would be assuming you make the same amount of money regardless if your interest rate is 7% or 3%. The person with a 3% interest would have over $600 more a month to invest due to difference in the mortgage payment. Also, it would be nice to consider a breakdown regarding possible tax implications due to mortgage interest being a write off.
That's a good point on the extra money associated with a lower interest rate! As far as tax benefits for mortgage interest write-off, it turns out most people don't even benefit with that write-off ever since the standard deduction went up so high in 2017. Details on that piece in this video: czcams.com/video/5WaeQsid6yY/video.html
@@BobSharpespot on. Standard is solid now
Your mortgage is lower than the rate of inflation. You are making money on the spread.
Your mortgage is 100% for sure. Your investment isn't no matter how much you believe it.
#freedom ur $5 a day series got me into your videos and I started investing $15 a day a few months ago and now I have $2500 in a brokerage account and I’m up over 8% keep up the work
That’s awesome, congrats!!
Thank you, I'm buying my second house right now. And this videos helps a lot and gives me ideas. I got the interest at 5.89 for 15 year. Gonna try to pay it fast 6 years or faster
Great video, very helpful! Additional things to consider would be potential write off of interest on your taxes. That's going down a whole different path. But, appreciate your efforts in putting this educational video together!
The number one reason to paying a mortgage off after 1/3 of the way through is reducing the banks risk. Losing a job will be regardless. Save to pay the house off and do it in one payment when it’s time. If that time never comes, then keep investing. Even if the stock market tanks when there’s enough diversity it’s not a problem.
We are doing both. The goal is to have it paid off before age 60 so we pay a little extra each month to accomplish this goal. That said, having it paid off even sooner would give us more flexibility, which is just as important.
At some point we plan to move. Even if interest rates go down by then, I don't see them going as low as before. So if we sell our home and buy a similar value home in a new location, it would be better to have a low or no mortgage. Its faster to pay off a mortgage that has a lower interest rate.
I have to keep reminding myself that I didn't take out a mortgage because I wanted to invest money. I took it out because I didn't have the money to pay for a house up front. It would be different if I took out the loan and put that money in the market because I'd also be making money on that money.
No matter your rate, pay off the mortgage. Imagine the freedom. ❤
Debt makes me anxious. I'm less focused because of that. Stress makes your health worse. Those two things cost you money. Lots of money.
What people can do is both. Pay mortage and invest. At first focus on paying mortage, with just small % put for the investing. Over the time when your income grows and your debt is getting smaller change the ratio.
Economically not the best. But it gives you some freedom, some security, and some profit.
Likewise point #2, peace of mind. That's the reason. Being debt free including the mortgage, that's one thing less to manage.
we are investing for two more years, vs a lower mortgage rate. After that we should have enough to pay off the mortgage - but we might not. We might stop paying the mortgage from our salary, and pay it from the invesment via drawdown. We have enough for the investment to pay the rest of the mortage term and while the investment is earning more than the mortgage rate, it’ll grow a little vs using the lump sum to pay off immediately. So at the end we’d have more money - but we have effectively the same ‘paid off’ peace of mind
Invest with what you can afford, stay in the game, persist and eventually you will reach a satisfying level of proficiency, Mrs Nancy told me that..
There’s also about the fact that you pay no taxes on money saved.
One thing not mentioned is mortgage interest deduction on your return for the additional 7 years if not paid off early.
@@mstelzman interestingly most people no longer benefit on that deduction. Details here: Avoid This Common Mortgage Interest Deduction Mistake
czcams.com/video/5WaeQsid6yY/video.html
What about a high yield savings account? With yields currently over 5%. Wouldn't it make sense to put your extra into a savings account? And when interest rates drop, you could take the extra w/ earnings and drop it on the mortgage.
Risk free?
First part of the video is great. I would argue the fact of the economic turmoil. If you’re constantly investing and it goes down 30/40/50% and you lose your job. Most will get a job right after or unemployment second with even 1 year or 7 years 50% down in the stocks will allow you to even dollar cost average out a portion or personal finance for many many years you have emergency funds maybe spouse help. Let’s say it’s so bad economically well my prediction is I’m probably not worried about paying anything I’m probably worried for my safety and survival. I believe we learned a lot from that recession and I do not think we will get back to that in the “near future”
Good stuff. Piece of mind and financial freedom is worth A LOT.
Please compare paying off mortgage early in the 1970s/early 80s and adjust for inflation. Take the same equation and plug it into the 1930s and adjust for inflation. Did inflation/deflation make a difference? Is it smart to pay off the mortgage early in both decades?
I'm in that boat now. I have a 3% mortgage that I plan to pay off early however, I'm fortunate enough where I don't have to stop investing. I have enough income to do both.
You should be paying $400 a month extra since your monthly mortgage is lower due to the 3% interest rate instead of the 7% so that means you will pay your mortgage even faster than 7 years
Ohhhh great point!
Yes, freedom financially is fantastic. Paying the house off is a guaranteed benefit. Investments are not guaranteed. You can lose your investment but not a paid off house.
My husband and I are in this exact position. I want to pay off the house and he wants to invest. We are stable enough to go the investment route, but I like the idea of the peace of mind
No tax deduction paying it off you can get 5% interest ln something like a capital one savings account but it’s compound interest so it builds exponentially.
Most people no longer benefit from the tax deduction since the standard deduction limits were raised in 2017.
What are your thoughts on putting the money into a HYSA at 5% until rates change and then taking that money out and putting it all on the 3.125% mortgage at that time?
Do both. $100 to stocks and $100 to principal
Shouldn’t one also consider discounting future cash flow (in and out) in this comparison. Assuming a 30 year loan, in 20 years (approx) the inflation adjusted loan payment will cost the debtor about 1/2 as much as the first payment. Future payments cost the debtor less.
One thing you missed in your comparison is that mortgage insurance is deductible on your taxes. That can make a very big difference to a lot of people, depending on your tax situation. That doesn't change the desire to be debt free, but for those of us that do the math and have OCD... yeah, I'll keep the mortgage. I can always pay the mortgage off with my investments if I want to.
I actually don’t use mortgage interest because for a great majority of people in United States - they actually aren’t getting a deduction anymore due to the higher standard deduction limits since 2017.
I’ve e heard that people who pay off their mortgage make a million dollars faster then people who don’t