Should You Pay off Your Mortgage Early? THE TRUTH

Should You Pay off Your Mortgage Early? THE TRUTH

In this video we look at the question of whether you should pay off your mortgage early or invest that money instead. Which will make you more money in the long run. Investing looks better from purely a numbers point of view, but it isn’t so simple, since there is a big psychological factor to it.

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Hey credit Warriors welcome to the show And in this video I want to talk about The question of should you pay your Mortgage off early there are many people Online that will insist that paying your Mortgage off early is a terrible idea Let me show you why paying off your Mortgage is an awful decision here's why You should not pay your house off early And some that think it is the best thing You could possibly do pay off the house Early then you max out retirement and Other wealth building tools and some of The people who think you should pay it Off early will give you all different Strategies for doing that with all sorts Of fancy names the best way to pay your Mortgage off faster is using the 1015 Rule so in this video I want to get to The bottom of why some people say you Shouldn't pay it off early and why some People say you should and then at the End I will give you what I think and Remember this is for educational Purposes only it is not Financial advice All right so mortgages use something Called an amortization schedule where Although the monthly payment stays the Same the amount of interest and Principle you are paying Chang over time It starts with you paying more in Interest and by the end of the mortgage You'll pay way less in interest and much More in principle okay principle is the

Amount of money you're actually paying Into the equity in your house okay the Amount that you actually own then in Addition you may have other components Like insurance and property taxes that Are put into an escra account as part of Your mortgage payment but that depends On how your mortgage is set up so in This video we'll just be looking at a Mortgage that's just principal and Interest now some people may Misunderstand the fact that you pay more In interest at the beginning and less in Principle saying oh the banks frontload The mortgage with interest so that they Get paid first but no that's actually Not correct it's simply because at the Beginning of the mortgage your balance Is the highest so you are being charged Interest on the whole balance versus Someone who is many years into a Mortgage that was originally say 250,000 they only have 80,000 left that They owe so they will be charged Interest on just that 80,000 000 which Will obviously be less money than on That 250,000 which is what it would have Been at the beginning I can show you This on my own mortgage statement the Principle that I was expected to pay off In my most recent payment actually I Paid a little bit more but the principal They asked me to pay was $390 and the interest was

673 if we look at how much I owe which Is $179,500 we work out the interest amount By dividing it by 100 and then times the Interest rate 4.5 we get the interest Payment for the year which is around 8,000 we then divide that by 12 to get The monthly rate and there we go $673 and a qu so that's how your monthly Interest is worked out and every month Because I am paying down the amount that I'm getting charged interest on for me My payments adjust by about a dollar so You can see on my February statement I Was paying 318 in principal and 674 in Interest then in March I was paying 319 In principal and 6 73 in interest the Monthly payment always stays exactly the Same but as you pay down the balance Less interest is charged and they then Reallocate those dollars from your Monthly payment to paying off principal And you can see this goes on down the Amortization schedule month after month Adjusting by a dollar or so each month Until there comes a point where the Principal payment is now bigger than the Interest payment and as we get to the Final years of the mortgage you can see I'm paying over 900 in principal per Month and less than 100 $ in interest Now what happens if you pay off some of Your mortgage principal early is that You skip ahead on the amortization

Schedule and the term of your loan Decreases you also skip a load of Interest payments that you would have Had to make so you can see here that for My mortgage at the place I'm at on the Amortization schedule about 4 and a half Years in if I pay $1,000 as just a Lumpsum oneoff payment I Sav $2,000 in Interest since that's 3 months fewer Payments that I would be paying if I Make a payment of $10,000 it saves me $119,000 in interest you can see that The saving per ,000 paid is going down As you get further along the Amortization schedule if I pay $20,000 Now as a lump sum I save only $335,000 so for someone at the beginning Of a mortgage you're really going to Save a lot by lowering the amount that You are getting charged interest on and Skipping ahead on the amortization Schedule SCH as you get later in the Mortgage each $1,000 you pay down won't Save you as much in interest you saw on My schedule near the end I will be Paying $900 in principal a month and Less than 100 in interest so you would Be paying almost $11,000 to save only $100 bucks in interest so shouldn't Everyone in the first few years of their Mortgage pay off their loan early well Yes or no the key reason people say Don't pay off your mortgage early is This opportunity cost for example paying

Extra per month versus investing in the Stock market would you be interested to Make an extra $500 a month payment you'd Save $887,000 in interest and you'll be Done with this in 24 years what if Instead I took my extra $500 a month and Invested it into a lowcost index fund That generates an 8% return for the next 24 years if you did that you would have A balance of $415,000 save 87,000 make 415,000 I Think that clip from 's Finance tips Shout out to John displays it well okay So a simple way of thinking of it is Saying if you owe money at 4.5% but you Could invest money and earn 8% the Average return of the S&P 500 over 30 Years if you invest the money that you Would have used to pay off that 4.5% Debt you actually make the difference 3.5% but there's even more because Something called compound interest comes Into play this is the thing that Einstein called The Eighth Wonder of the World I start earning interest on the Interest this is the fundamental Difference between compound interest and Simple interest mortgages are simple Interest you pay all the interest you Owe that month so there's no issue of You owing interest on the interest that You're being charged but when you invest Money if you don't remove that interest As cash flow each month but instead

Leave it in the account to get Reinvested and compound you earn Interest on interest and your wealth Will grow exponentially so if you can Earn the same interest rate or higher on A high interest savings account or Stocks or bonds or other Investments It's always going to be better to invest Rather than to pay off your house early But that's not the only part of the Equation because there is a big Psychological element to paying off your Mortgage early let's now look at some Dave Ramsey quotes first is what he says About a forced savings account okay this Is how he describes a house so you may Say oh I won't put extra money towards My mortgage I'll save it and I'll invest It but what's to stop you from taking That money out when you want to buy some Expensive item and messing up your Compound interest schedule if it's being Put towards equity in your house it's Locked in there you can do it but it's a Lot of trouble to get the equity out of Your house to go buy a bass boat it's Not hard to do it out of your savings Account so a bass boat I mean it's not What I would have thought of but you can Just substitute bass boat with a Lambo Or a jet ski or whatever expensive item Would be your dream to buy but what he Says though is true sure you could go Get a home equity line of credit to

Access that Equity that is locked up in Your home but that is an application That takes a few weeks it involves an Appraiser coming to your house to Value It and that hassle is a barrier to you Accessing those funds locked up in your House compare that with hitting the sell Button to liquidate some stocks and then Transferring those funds to your Checking account so that's the first Point paying your mortgage early forces You to save the money by locking it up In your house and your house incre Ines In value too although that increases Yours no matter how much you owe but Just to show you that you are kind of Getting an interest rate on that money That you're locking up in your house Then the next point is that Dave Ramsey Did a survey of millionaires and here's What he found two primary things we see That those habits that cause them to be Successful meaning hitting a million Dollar net worth and above is the Primary initial levels of wealth the First million or two million is 401k and a paid for house and why do They do that because of risk because 100% of the foreclosures occur on a House with a mortgage and when you have Zero mortgage and you walk in the Backyard and the the the grass feels Different under your feet it's mine by God you know kind of thing it changes

The way you operate the rest of your Money because you're standing on such a More solid foundation to live your life And I think for me that is really the Golden piece of information in this Whole thing your primary residence if You pay it off early is now 100% yours And no Bank can take it away from you of Course you could still lose it if you Didn't pay your property taxes but That's going to be you know on the Average house say $500 a month versus The average mortgage payment in the US Which is now about 2,800 and something Per month and that gives you freedom and Then with the monthly cash flow that That frees up you can then go crazy in Investing in stocks and real estate and Still end up with a load of money Invested before retirement and if you Want to do something like changing jobs There is much less risk for you because You can much more easily withstand a few Months of no income or a period of Reduced income or because you've paid Your mortgage off early and you don't Have those monthly payments anymore now I only Advocate paying off your primary Residence early if you have rental Properties there's really no point in Paying those off early an exception may Be if you are close to retirement and You've already committed to not buying Any more rals you may just want to get

Them fully paid off before you retire so You can enjoy the cash flow to fund your Retirement because remember as you pay Off your mortgage your monthly payment Never changes so if you had say $20,000 Left to go and you paid it all off in a Lump sum well that could free up say $2,000 or more in monthly cash flow Whatever your mortgage payment is and You could then use that to fund your Life but for younger people it really Makes no sense to pay off investment Properties early in my opinion just use The money to either pay off your primary Residence or go and buy more rentals or Stocks now I can't tell you absolutely Which way is right for you remember this Isn't financial advice so here are the Key points if you can invest at a higher Interest rate than what you have on your Mortgage that normally does work out Better you'll generate more money doing That but paying off a mortgage forces You to save locking the money up in your House so it's hard to get at it will Make more sense early in a mortgage in My opinion so that you can reduce the Amount of money you're being charged Interest on and skipping where ahead on The amortization schedule and it Provides the Ultimate Security of owning Your own home you may wonder what I do Personally I add $50 to $100 extra in Principle each month so last month for

Example I added $50 so I paid $440 Instead of$ 390 this has already cut a Few months off my mortgage term and I Hope to do it more maybe adding 1 to 200 Instead of 50 to 100 and getting my Mortgage down to around 20 years instead Of 30 but I'm not going to go wild after All my interest rate is 4.5% there is an Opportunity cost in paying it down but The idea of having no housing payment is Certainly attractive but it's not Something I'm going to strive for at all Costs after all inflation makes my fixed Mortgage payment feel smaller every year Versus the cost of living in general but I do love the idea of having no payment At all it's the ultimate middle finger To the corporations and who knows maybe I will get more Dave Rams if fired as I Grow older and start making some serious Lumpsum payments but what would you guys Do I'd love to hear what you think down In the comments below and remember There's no right or wrong answer to this Question there are many variables like Risk tolerance time until retirement how Early or late you are in your loan Etc Please subscribe to the channel if You're new we'll see you next time Bye-bye

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