In many situations, paying off your mortgage early could potentially be costing you hundreds of thousands of dollars…and I’ll run the numbers to show this based off real world examples. Enjoy! Add me on Snapchat/Instagram: GPStephan
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This is one of those subjects that’s not intuitive for most people - you would think that paying off your mortgage early would be a really good idea. But this isn’t always the case. The reason people think this way is because they haven’t really looked at the true cost of ownership, what their money is really worth, and they only focus on the end number. On our $400,000 loan example, your payment is $1956 per month and you wind up paying $304,000 in interest over 30 years. But there are three very important considerations here:
1. The first is the mortgage interest tax write off - this is what makes real estate extremely appealing, and why keeping a mortgage helps long term.For the average person in a 23% tax bracket, with a 4.2% interest rate, after you factor in your write offs, your ACTUAL cost of interest is only 3.23%.
2. The second factor is Inflation. Because the bank is holding the entire loan over 30 years and you get to pay bits and pieces of it over time, it should be safe to assume a 2% AVERAGE inflation rate over 30 years. This means that even though you’re paying a NET interest rate now of 3.23%, if we subtract 2% annually for inflation, this means that you’re really only effectively paying 1.23% in interest after tax write offs and inflation.
3. Finally, the third factor is opportunity cost. Can you make MORE than a 1.23% return ANYWHERE ELSE adjusted for inflation? The answer is pretty much always yes. This means that if you INVEST your money instead of paying down the mortgage, mathematically over the term of the loan you’d come out ahead than if you just paid off the loan early.
So with these points above, we’ll take two scenarios. In scenario one, you have a 30-year, $400,000 loan at a 4.2% interest rate that you pay off in half the time - you increase your payments from $1956 to $3000 per month in order to make this happen. Then once the loan is paid off, you invest the full amount in the stock market for another 15 years. After an additional 15 years, that works out to be just over $1,000,000. So you now have a paid of house plus a million dollars.
But what happens if you kept the 30-year mortgage and instead of you paying it off in half the time by increasing your payments to $3000/mo, you just invested the extra $1050 per month instead? Because you didn’t pay down your mortgage early and you invested that extra money instead, at a 7.5% return in an SP500 index fund…at the end of 30 years, you’ll have a paid off home PLUS $1,433,000..
This means that over 30 years, that’s a difference of $433,000…by NOT paying down your mortgage early, and instead investing the difference.
Although keep in mind, if you have a really high interest rate on your loan, above about 6%, it’s probably better to pay it off. This is because the upside to investing gets smaller and smaller the higher your mortgage interest rate is.
But the biggest advantage of paying it off early is that with the above example, we assume the person will actually invest the money rather than pay off their loan early. In order for this calculation to work, the person needs to be disciplined enough to actually invest the different and not spend it.
But for anyone with the discipline to actually stick with an investing plan instead of paying down the mortgage, statistically and mathematically, you can often make more money paying it off slowly than paying it off early.
For business inquiries or one-on-one real estate investing/real estate agent consulting or coaching, you can reach me at GrahamStephanBusiness @gmail.com
Suggested reading:
The Millionaire Real Estate Agent: http://goo.gl/TPTSVC
Your money or your life: https://goo.gl/fmlaJR
The Millionaire Real Estate Investor: https://goo.gl/sV9xtl
How to Win Friends and Influence People: https://goo.gl/1f3Meq
Think and grow rich: https://goo.gl/SSKlyu
Awaken the giant within: https://goo.gl/niIAEI
The Book on Rental Property Investing: https://goo.gl/qtJqFq
Favorite Credit Cards:
Chase Sapphire Reserve - https://goo.gl/sT68EC
American Express Platinum - https://goo.gl/C9n4e3
Join the private Real Estate Facebook Group:
https://www.facebook.com/groups/therealestatemillionairemastermind/
The Real Estate Agent Academy: Learn how to start and grow your career as a Real Estate Agent to a Six-Figure Income, how to best build your network of clients, expand into luxury markets, and the exact steps I’ve used to grow my business from $0 to over $120 million in sales: https://goo.gl/UFpi4c
This is one of those subjects that’s not intuitive for most people - you would think that paying off your mortgage early would be a really good idea. But this isn’t always the case. The reason people think this way is because they haven’t really looked at the true cost of ownership, what their money is really worth, and they only focus on the end number. On our $400,000 loan example, your payment is $1956 per month and you wind up paying $304,000 in interest over 30 years. But there are three very important considerations here:
1. The first is the mortgage interest tax write off - this is what makes real estate extremely appealing, and why keeping a mortgage helps long term.For the average person in a 23% tax bracket, with a 4.2% interest rate, after you factor in your write offs, your ACTUAL cost of interest is only 3.23%.
2. The second factor is Inflation. Because the bank is holding the entire loan over 30 years and you get to pay bits and pieces of it over time, it should be safe to assume a 2% AVERAGE inflation rate over 30 years. This means that even though you’re paying a NET interest rate now of 3.23%, if we subtract 2% annually for inflation, this means that you’re really only effectively paying 1.23% in interest after tax write offs and inflation.
3. Finally, the third factor is opportunity cost. Can you make MORE than a 1.23% return ANYWHERE ELSE adjusted for inflation? The answer is pretty much always yes. This means that if you INVEST your money instead of paying down the mortgage, mathematically over the term of the loan you’d come out ahead than if you just paid off the loan early.
So with these points above, we’ll take two scenarios. In scenario one, you have a 30-year, $400,000 loan at a 4.2% interest rate that you pay off in half the time - you increase your payments from $1956 to $3000 per month in order to make this happen. Then once the loan is paid off, you invest the full amount in the stock market for another 15 years. After an additional 15 years, that works out to be just over $1,000,000. So you now have a paid of house plus a million dollars.
But what happens if you kept the 30-year mortgage and instead of you paying it off in half the time by increasing your payments to $3000/mo, you just invested the extra $1050 per month instead? Because you didn’t pay down your mortgage early and you invested that extra money instead, at a 7.5% return in an SP500 index fund…at the end of 30 years, you’ll have a paid off home PLUS $1,433,000..
This means that over 30 years, that’s a difference of $433,000…by NOT paying down your mortgage early, and instead investing the difference.
Although keep in mind, if you have a really high interest rate on your loan, above about 6%, it’s probably better to pay it off. This is because the upside to investing gets smaller and smaller the higher your mortgage interest rate is.
But the biggest advantage of paying it off early is that with the above example, we assume the person will actually invest the money rather than pay off their loan early. In order for this calculation to work, the person needs to be disciplined enough to actually invest the different and not spend it.
But for anyone with the discipline to actually stick with an investing plan instead of paying down the mortgage, statistically and mathematically, you can often make more money paying it off slowly than paying it off early.
For business inquiries or one-on-one real estate investing/real estate agent consulting or coaching, you can reach me at GrahamStephanBusiness @gmail.com
Suggested reading:
The Millionaire Real Estate Agent: http://goo.gl/TPTSVC
Your money or your life: https://goo.gl/fmlaJR
The Millionaire Real Estate Investor: https://goo.gl/sV9xtl
How to Win Friends and Influence People: https://goo.gl/1f3Meq
Think and grow rich: https://goo.gl/SSKlyu
Awaken the giant within: https://goo.gl/niIAEI
The Book on Rental Property Investing: https://goo.gl/qtJqFq
Favorite Credit Cards:
Chase Sapphire Reserve - https://goo.gl/sT68EC
American Express Platinum - https://goo.gl/C9n4e3
56% of Americans can't cover a $1,000 emergency, 63% are living paycheck to paycheck. Most people don't have an extra $1050 a month left after all their bills are paid.
But if I pay it off in 15 years now I can invest $3000 a month in the stock market and if something happens with my job I’ll be fine math doesn’t equate for fear
Or the best method, don't get a mortgage.
A paid off 400k house (which will be worth more in 15 or 30yrs) money in savings sounds like retirement to me. Lol
Best video
Yea don’t take this guys advice . Having no debt is an much better life then having an reoccurring debt for 25 years . And once you’re done paying off your mortgage early you have all that money to invest .
Your first mistake was getting a 30 year mortgage.
From Canada here; no CRA deduction for mortgage but inflation is off the charts. At a five year fixed mortgage of 1.86% and inflation at a 30 year high its obvious to pay the death pledge off as slowly as possible.
Fantastic job putting this info together and doing the side by side comparison
How do I write off my house playa?
Just bought my first property and this video really helped me. Thank you. I know that you made it three years ago, but still, thank you. It served me well 🙏
Great video graham
You aren’t factoring in risk into your equation, cash flow flexibility, and the psychological benefits.
So you would rather pay $16K to get back $3.8k? What kind of math is that. I think I would rather keep the $12k in my pocket or invest that. The mortgage deduction is never a good argument.
Graham is soo much more polished now a days… love to see him debate Dave Ramsey
WONDERFUL analysis. Thank you, G!!
What about opportunity cost of the 2k mortgage payment?
Where were you when I was young? Wish I would have known then what you are teaching me now..!!! Don't give up you teaching..Thank You..
Can’t write off mortgage anymore.
I mean, it depends on how much self control you have. And your personality. Personally, having a paid off home would let me sleep better.
80% of people dont invest that money or invest in wrong stuff. So that should not be included.
Great video! I've been a long time fan and just got my first property, renting out to my buddies for less than the typical rent and it's a win win for everyone.
I have zero regrets paying off my mortgage. I enjoy investing alot more now considering I'm completely debt free… 😁
My interest is 3.1 percent yeah.
I’m doing both🤣 investing & paying large amounts on my mortgage🤣—-🙄I know I’m a fool.
Can you do a video on how to protect a paid off property/house?
isn't this assuming that the tax payer doesn't use the standard deduction? Under Trump it's 24000 per couple..am I wrong?
Brilliant! There is a huge psychological appeal to having lower living expenses and the bragging rights of no mortgage. But! Having money working for you passively with compounding interest – no brainer.
It’s beneficial paying off a mortgage early if you’re seeking to purchase another property for investment purposes.
You can only write off mortgage interest if you itemize above the standard deduction. You also can't predict inflation or the stock market.
Gimme that HELOC so I can go buy more dogecoin