Should You Pay Off Your Mortgage Early or Invest? | Financial Advisor Explains #Finance

hey guys so in this CashNews.co we’re going through the math on whether it’s better to pay off your mortgage early or invest usually if you are trying to answer this question it means that you have extra money left over after you pay all of your bills for the month and now

you’re just trying to optimize the remaining dollars that you have so first off I just want to say if that is you congratulations because most people are not in this situation as the gross personal Savings rate in America is around 3.6% and many people are living paycheck to

paycheck now in order to figure out what is best for you it’s going to depend on a lot factors but the biggest factor is your mortgage interest rate we’re first going to talk about how the mortgage payment is broken down because understanding how it works is absolutely key in figuring

out what’s right for you then once we understand that we can actually answer what makes the most sense mathematically and financially and then in addition I’ll share some strategies to help you pay off your home early if that’s what you’re interested in and other intangibles

to consider when it comes to paying off the mortgage early or investing all right so at a really basic level when you get a mortgage you’re buying a home with borrowed money from your Bank you must then pay back the sum that you borrowed with interest over time because hey that’s how

Banks make money so let’s say you borrow $400,000 to buy a house and you get this standard 30-year fixed rate mortgage the bank will make it really easy for you and break down how much you need to pay them back on a monthly basis for the next 30 Years or 360 payments so each monthly payment

is broken down into two components and understanding this is really vital in answering this whole question that we have today the first component is you borrowed a large sum of money so you need to pay that thatb back over the 30 years and this is called the principal the second part of the payment

is the interest on the total sum of the money that you borrowed so interest on whatever remaining balance you haven’t paid off yet so on a $400,000 Loan over 30 years at a 7% interest rate your interest payment is always going to be represented as the following it’s

your balance remaining times the interest rate or 7% divided by 12 months and that is your monthly payment of Interest so in the first month of your $400,000 mortgage your payment is going to be roughly 26 $60 but here’s the really fascinating or messed up part depending on how you view

Finance a mortgage follows what’s called an amortization schedule which is just a fancy table that details each monthly payment on a Loan in month one

of your payment your 2660 payment is broken up into the two components that we talked about earlier but here’s the crazy thing $2,333 of it goes towards interest and only $327 of your payment goes towards the total amount that you actually owe for the house and this is actually how mortgages

work the banks frontload all the interest payments because they need to get paid first but by doing so you don’t really ever make a dent in the principal balance AKA how much you owe until way later in the life of the Loan and this becomes problematic because you’re

being charged interest on the remaining balance that you owe and if you’re never making a dent in the principle it can seem kind of hopeless it’s so shocking in fact that in the first 20 years out of a 30-year fix rate mortgage your interest payments actually still exceed the amount

that you pay on the principal on Every Single monthly payment said differently that means in the first 20 years or 240 payments the majority of your payments are still going towards the bank and not towards paying back your Loan in fact if we take a look at the yearly amortization

schedule right here you can see at the end of year 20 you will still owe $229,200 on your house so you’re 66% through the mortgage already in terms of time elapsed but you’ve only paid off 42.75 per of the sum that you originally borrowed talk about disproportional and often times with

mortgages the amount of interest that you pay could easily be equal equal to or more than the amount that you actually borrowed if you borrowed $400,000 for 30 years at an interest rate of 7% the total amount of interest that you pay is actually $558,500 th000 in the first place that brings the

total amount that you paid for this Loan to be 958k now if your interest rate were 5% you would have paid $373,000 in interest over the life of the Loan and if your interest rate was 3% you will pay $27,000 $19 over the life of the Loan all pretty

crazy so this is pretty eye opening that means if we can reduce our principal balance as soon as we can we can actually not only pay off our mortgage faster we can reduce the total amount of interest that we pay saving us a ton of money in the long run all right hopefully you’re still with me

the next part is actually very interesting so if you’re enjoying this so far make sure to subscribe to the channel it’s completely free and only takes .1 seconds or less so let’s actually examine now what Stock Market returns look like and actually whether or not

it makes sense to pay off your mortgage early or invest now when it comes to investing quote the S&P 500’s average annualized return since adopting 500 stocks into the index in 1957 is around 10.26% so you can reasonably expect to get around a 10% return in the Stock

Market historically and after considering Taxes a good ballpark figure that I think we could probably get is around 7 to 8% when it comes to the interest rate on your mortgage Let’s Pretend the interest rate is say let’s say 3% if you make extra payments

towards your mortgage then you’re basically going to be earning 3% on your money in this situation so let’s say for example you got your mortgage back in 2021 when the mortgages were around let’s say 2.98% you mathematically are going to be a lot better off investing instead of

paying off your mortgage and that’s simply due to the fact that you are earning 3% by making extra payments on your mortgage but if you took extra dollars and invested it you were averaging 10% per year or roughly 7 to 8% after tax which is definitely higher than your 3% so let’s

examine how asset classes have been performing over the last 10 years and we can see the annualized returns here of different asset classes like large cap growth stocks large cap value stocks small caps International stocks cash and Etc you can feel free to pause the CashNews.co here if you’d

like to see how certain asset classes have performed over the past 10 years but what I really want to show you is this summary table of all the returns of the S&P 500 from 1928 we can see that since 2009 most years have returned positively and the average year since 2009 returns way higher than

let’s say 3% we should also note though that when you are investing there are going to be a couple of losing years that you might experience for example in 2018 and 2022 so my takeaway as of right now at this point in the CashNews.co is that if you have a low interest rate let’s say

2.5% 3% or maybe even up to 5% on your mortgage it’s always going to make more financial sense to invest than to pay off your mortgage early when the Interest Rates get to say 6 or 7% like they have been most recently the decision becomes a lot closer some people are going to

favor paying off the mortgage early not due to financial benefits but more intangible benefits like peace of mind let’s pretend you have a 6% interest rate on your mortgage now with a 6% interest rate you’re effectively getting a risk-free and tax-free 6% rate of return on any extra

dollars that you pay off your mortgage early with while 6% is not impossible to achieve in the Stock Market it may be risky to achieve in the Stock Market because as we showed earlier not every year is going to return positively there’s always going to be

some inherent risk whenever you take your money and invest it into something in addition there is an intangible benefit of being able to get peace of mind and a risk-free rate of return of 6% on your money that you may choose to actually pay off your mortgage early instead of investing it now there

is one more component and variable that we need to discuss here that I haven’t actually accounted for but it is absolutely Paramount and very important to this whole equation which is how many years do you have left on your mortgage and how many years do you have left to invest generally

speaking the more time you have left on your mortgage the greater the potential benefit from investing is for that same time period so so assuming both are equal and that’s because the power of compounding so if you’re able to use an extra $500 per month for example and let’s say

we actually invest it instead of paying off or mortgage an extra $500 a month for 25 years and an 8% interest rate which is the average Stock Market returns will actually Yield you over $473,000 paying off an extra $500 per month for 25 years towards your mortgage

will save you $188,000 in interest over the life of the Loan now why is this you’ll notice that in both of these screenshots I used 8% for both the investing rate of return as well as the mortgage interest rate why is it that if your interest rate on your mortgage is 8% and

your investing rate is 8% that your results are going to be wildly different well that all has to do with the amortization schedule we are now trying to compare the amortization of the mortgage to just the compounded growth of the Investments which by Nature we really can’t

compare the two your extra payments in the mortgage are going to reduce the principal faster and your Savings are in the form of reduced interest over time versus in the investing scenario you are taking your money and compounding the returns immediately which in turn grows your

end balance exponentially we’re also considering a 25-year time Horizon in this example which not everyone watching this CashNews.co has perhaps you have 5 years left on your mortgage 10 years or say 15 years at that point the investing versus paying off debate becomes a lot closer in terms

of the math and you need to run the numbers yourself but so far if you want my two general rules of thumb so far in this CashNews.co it is number one the lower your interest rate on your mortgage the better it probably is to invest and and number two the longer your time Horizon the better it is

probably to invest but both of these general rules of thumb are coming from the financial and mathematical Viewpoint and paying off a home is not exactly always a financial decision the freedom you might get when you don’t have to make a mortgage payment every month might be worth more to you

than anything money could buy so with that being said how do you go about paying off your mortgage faster without breaking the bank entirely I’m going to run you through three different strategies which all have the same common theme which is that you actually have to apply extra payments

towards the uh principal balance of your mortgage but however these strategies are easier to mentally handle and let’s actually use calculator. Net’s mortgage payoff calculator to really help us illustrate these the first strategy involves making bi-weekly payments so if your mortgage

payment is 2660 a month like in our example divide that monthly payment into two and make that payment every 2 weeks so in this case 2660 divide by 2 is $1,330 by doing so every 2 weeks you are actually making 26 bi-weekly payments or 13 monthly total payments a year that means over the course of

the Loan you are making one extra payment towards the principal every single year now please note though whenever you do this you must call your bank and let them know to apply any extra payments beyond the normal monthly interest you owe to go towards the principal balance and not

the future interest payments and that’s how you’re actually going to pay off your mortgage faster so let’s say on this $400,000 mortgage at a 7% interest rate making bi-weekly payments actually allows you to pay off the mortgage the entire Mortgage in 23 years and 11 months saving

you 6 years and 1 month of payments and over $134,000 in interest so I think this is a bit of a mental hack but if you’re able to afford this from the get-go of your mortgage you could see yourself saving a ton of money throughout the course of the Loan all right the next

strategy just involves paying down an extra 00 or $200 per month if you’re able to say pay an extra $200 per month on this Mortgage in particular you’ll still save roughly 6 years of payments and $126,000 in interest both of these first two strategies work much better when interest rate

is say 6 to 7 or even 8% but when the interest rate is a lot lower such as a 2.5 or 3% interest rate the Savings are just going to be a little bit smaller all right and the last strategy that I have for you guys here is that whenever you guys get a tax refund perhaps you get a

bonus check or a winfall of cash you can apply that onetime payment to the principal balance you can see here that if we got a windfall of cash of around $112,500 one time and one time only and we put it towards that principal balance the Loan will be paid off in 201 years and 2

months AKA 2 years and 10 months earlier and we saved $78,900 in interest on a 30-year Loan the more time you have left on the mortgage the more of these principles of paying off your mortgage early will save you more money in the long run I hope this illustrates to you the power

of making extra payments towards paying off your mortgage which should in turn give you powerful and tangible benefits such as the following first I think you get increased peace of mind not having a mortgage payment is almost like a weight lifted off your shoulders second not having a monthly

payment means that you free up that money for other activities such as investing third it lowers your Debt to Income ratio which could in turn increase your Credit score in case you want to borrow more money for something else I hope you

don’t but in case you want to and lastly this home could be ready for you for retirement and it could be an asset that you pass down to your kids but if your kids are really greedy and you really hate them and you want to send them off to boarding school then you don’t have to either

all right but what would you do what are you going to do let me know in the comments I would love to hear from you if you’re interested in how much of a house you can afford and if your current home is within good Budgeting principles check out this CashNews.co right here and

also make sure to subscribe to this channel it’s free once again I’ll see you guys in that CashNews.co or a next one on my channel thank you for being here all right peace