You're forgetting a teeny tiny concept called Opportunity Cost, which could invalidate the entire article. Not trying to be a d*ck, just something worth considering.
Oh I'm well aware of opportunity cost. This article is intended to explain a concept most people don't understand. If you're thinking about the opportunity cost of paying off your mortgage versus investing in assets, you already understand the concept I'm explaining.
The average homeowner doesn't. They'll make their mortgage payment, and expand their lifestyle to consume most of the rest of their income. Understanding the fundamentals of mortgage math is an easier sell than explaining the stock market long-term returns and DCA and a Roth IRA.
That's why I don't get into all that in the article. Subject for another day.
Comparing $30,000 one time payment to save $172,362 and pay the mortgage off in 25 years to investing that $30,000 in S&P 500 index assuming inflation adjusted average YoY return (6.37%) only nets $140,475. I was surprised and now finally convinced that paying off mortgage early especially with the high interest rates is worth it. However once you have an interest rate lower than 6.37% you net more money investing rather than paying off. (Maybe there are tax reasons paying mortgage off is better still even with a lower rate iif so please let me know)
You also shouldn’t adjust your rate of return from the s&p for inflation unless you do the same for your savings from paying off mortgage early. And don’t forget to take taxes into account. I THINK (not an expert) that the taxes are a wash (the interest on the mortgage is deductible but the gain from the s&p is taxed). But that is not true if the s&p investment is made through a Roth IRA. Until you max that out nothing else is close.
We paid off our house last January and I don’t have any regrets. We had a 3% mortgage but still worth owning the house outright and no more payments, except property taxes. I follow Dave Ramsey and his advice has made me wealthy. Worth over $2 million and the wife and I are under 50. Get rich slow, it works.
Seriously tho,good article,thank you. I'm about to pay off the mortgage on our first house and now debating where to use the refi money. Fha duplex or bitcoin
Paying off your mortgage early only makes sense if there is nothing else you can do that has a higher rate of return. Also worth considering that mortgage interest is tax deductible (for your primary residence). Depositing to a tax-favored retirement account usually beats paying more on the mortgage.
If you have a 7% interest rate it’s true it’s hard to beat that, but it’s only a few years since the rate was below 3% and lots of people still have fixed-rate mortgages from that time.
As a newly minted homeowner (mortgage paid off 7.5 years earlier than original 30 year term, including refi for an addition), I'd be interested to hear what some of the other assets are that we should be considering. Other than the obvious rental/investment properties and stock/private company investments.
Everyone's financial situation is different, so what works for me certainly won't be right for everyone. I own some rental and investment properties. Beyond that, over the past few years I've shifted my savings into a small percentage of Microstrategy stock, and the rest into Bitcoin. I don't own any other stocks or invest in any other assets.
That's based on what I've learned about banking and the monetary system over the past 5 years or so. But I'm young and single and my short-term risk tolerance is extremely high. My allocation is based on a strong conviction that every other asset is going to underperform Bitcoin over the next 20 years. If I'm wrong, it will be because the world has taken such a dramatic turn for the worse that my financial savings will be the least of my worries.
What about doing a mortgage recast? It’s not a refi where you have to pay closing costs and all that. The recast only has a couple hundred dollars in fees. You aren’t shaving years off your mortgage because it’s still set at 30 year but you are paying down your principal and thus lowering your monthly payment.
Very well laid out. I am fortunate enough to have. 2-3/8% mortgage and I’ve always wrestled with the question to pay down the principle or invest in the QQQ’s. I believe the Q’s were a clear winner until rates went up, now I would say the situation is reversed.
Unless you have an ARM almost anything you can do would be better than paying off your mortgage, including putting the money in one of the many savings accounts that pays 4+ percent interest.
This is the advice I’ve heard too, even just putting money in index fund would historically pay you back more than paying off the mortgage would save you
You're forgetting a teeny tiny concept called Opportunity Cost, which could invalidate the entire article. Not trying to be a d*ck, just something worth considering.
Oh I'm well aware of opportunity cost. This article is intended to explain a concept most people don't understand. If you're thinking about the opportunity cost of paying off your mortgage versus investing in assets, you already understand the concept I'm explaining.
The average homeowner doesn't. They'll make their mortgage payment, and expand their lifestyle to consume most of the rest of their income. Understanding the fundamentals of mortgage math is an easier sell than explaining the stock market long-term returns and DCA and a Roth IRA.
That's why I don't get into all that in the article. Subject for another day.
Comparing $30,000 one time payment to save $172,362 and pay the mortgage off in 25 years to investing that $30,000 in S&P 500 index assuming inflation adjusted average YoY return (6.37%) only nets $140,475. I was surprised and now finally convinced that paying off mortgage early especially with the high interest rates is worth it. However once you have an interest rate lower than 6.37% you net more money investing rather than paying off. (Maybe there are tax reasons paying mortgage off is better still even with a lower rate iif so please let me know)
You also shouldn’t adjust your rate of return from the s&p for inflation unless you do the same for your savings from paying off mortgage early. And don’t forget to take taxes into account. I THINK (not an expert) that the taxes are a wash (the interest on the mortgage is deductible but the gain from the s&p is taxed). But that is not true if the s&p investment is made through a Roth IRA. Until you max that out nothing else is close.
We paid off our house last January and I don’t have any regrets. We had a 3% mortgage but still worth owning the house outright and no more payments, except property taxes. I follow Dave Ramsey and his advice has made me wealthy. Worth over $2 million and the wife and I are under 50. Get rich slow, it works.
Great post that very clearly describes the concept of paying down your mortgage early!
Check out uneducated economist on youtube!
Did you really say viola,instead of voila
Lol good eye, I didn't notice that once until you pointed it out.
Seriously tho,good article,thank you. I'm about to pay off the mortgage on our first house and now debating where to use the refi money. Fha duplex or bitcoin
Paying off your mortgage early only makes sense if there is nothing else you can do that has a higher rate of return. Also worth considering that mortgage interest is tax deductible (for your primary residence). Depositing to a tax-favored retirement account usually beats paying more on the mortgage.
If you have a 7% interest rate it’s true it’s hard to beat that, but it’s only a few years since the rate was below 3% and lots of people still have fixed-rate mortgages from that time.
This ^ 👍
Minor but important thing: it’s principal not principle!
As a newly minted homeowner (mortgage paid off 7.5 years earlier than original 30 year term, including refi for an addition), I'd be interested to hear what some of the other assets are that we should be considering. Other than the obvious rental/investment properties and stock/private company investments.
Everyone's financial situation is different, so what works for me certainly won't be right for everyone. I own some rental and investment properties. Beyond that, over the past few years I've shifted my savings into a small percentage of Microstrategy stock, and the rest into Bitcoin. I don't own any other stocks or invest in any other assets.
That's based on what I've learned about banking and the monetary system over the past 5 years or so. But I'm young and single and my short-term risk tolerance is extremely high. My allocation is based on a strong conviction that every other asset is going to underperform Bitcoin over the next 20 years. If I'm wrong, it will be because the world has taken such a dramatic turn for the worse that my financial savings will be the least of my worries.
What about doing a mortgage recast? It’s not a refi where you have to pay closing costs and all that. The recast only has a couple hundred dollars in fees. You aren’t shaving years off your mortgage because it’s still set at 30 year but you are paying down your principal and thus lowering your monthly payment.
That could certainly make sense, depending on your financial situation and goals. It's a slightly different way to get a similar result.
I happen to be taking the SOA’s Financial Mathematics exam in a few months, so this was a delightful refresher.
Very well laid out. I am fortunate enough to have. 2-3/8% mortgage and I’ve always wrestled with the question to pay down the principle or invest in the QQQ’s. I believe the Q’s were a clear winner until rates went up, now I would say the situation is reversed.
Unless you have an ARM almost anything you can do would be better than paying off your mortgage, including putting the money in one of the many savings accounts that pays 4+ percent interest.
This is the advice I’ve heard too, even just putting money in index fund would historically pay you back more than paying off the mortgage would save you