So I paid off my house September 2019 at the age of 34 just shy of my 35th birthday. A few months later covid hit and the wife lost her job as a hairdresser. No stress in my household
Mortgage rates are currently at an all time high since 2000(23 years) and based on statistics on inflation, we might see that number skyrocket further, a 30-year fixed rate was only 5% this time last year, so do I just keep waiting for a housing crash before buying or redirect my focus to the equity market.
True, I mostly just buy and hold stocks, but my portfolio has been mostly in the red for quite awhile now. Unfortunately to be able to make good gains, you’ll need to be consistent and restructure your portfolio frequently.
In my opinion, it was much easier investing back in the 60s but it’s a lot trickier now, those making consistent profit in these times are professionals reason I’ve been using an advisor for the past 5 years to consistently build my portfolio in preparations for retirement.
Melissa Elise Robinson is the coach that guides me. She’s a verified coach and she helped me see that returns can be made in both bull and bear markets. She covers things like investing, insurance, making sure retirement is well funded and looking at ways to have a volatility buffer for investment risk, lots of things like that.
I don't disagree with anything in the video, but I want to point out that the peace of mind of having a paid off house is also worth a lot. You never feel free when you have debt, at least I didn't. When Covid-19 first hit and there was lots of panic, I took great comfort in knowing that my wife and I could lose our jobs, but we wouldn't loose the roof over our heads.
@@Corpsecreate Your point is well worth careful thought. In my case, my wife and I were able to max out our 401k's and Roth IRA's while paying off our house early. We chose to skimp on vacations, cars, etc. to pay off our mortgage. You could just as easily question people about why they took a vacation or didn't drive their beater car for another few years because it would cost them X amount of dollars 30 years from now. If we really want to go down that path, we could conclude that no one in their 20's should spend money on fun things because of how much they're giving up in future earnings. Each person's situation is different. I personally HATE the feeling of debt. No regrets getting rid of my mortgage.
@@vulpixelful You can always rent paying someone else mortgage and personal property tax and get kicked out if you don't pay. You can't afford a home just say so. Only about 4 countries in the world that don't have property taxes. My $1700/yr. property tax was less than three days pay for me each year.
I'm in the same boat but was hit by a drunk driver having a paid off house is a blessing for sure so far 1.5 years off work with .y wife working doing good because debt free
Yep. These guys assume linear mathematical analysis but not the “art” they spoke about. If they really wanted to do the math, they would add a risk factor in melissas plan. Likely would end up closer to a wash
@@northwestgardener5076 i think you’re right on the money. I bet you can afford to invest even more. It’s not all about the money and we aren’t guaranteed to live to any age
@@MoneyGuyShow 71 yrs old ppl has to eat and like nice things that cost the same as you, you idiot age has nothing to do with everyday needs that cost money
@@spooler24 no, didn't mean to come off like that; i was saying he's not speaking for everybody with different pay scales. i pay extra on my mortgage and so far have cut out at least 7 yrs by paying extra sometimes 150 to 200. what ever i can afford. im so close to the end and now thinking, im a senior, with only one home to claim on my taxes, should i pay it off, im not sure if it would be beneficial due to the end of the year for taxes. sometimes i get something back, i never owe, so once i finish the mortgage i have nothing to claim. i am debt free been that way for yrs, pay everything with cash or i don't get. owing bothers me...this is something that is making me go hmmmmm. i haven't figure it out yet...
Same! Trying to pay my 30 like a 20 with a couple hundred extra bucks each month. Can't refi to a shorter loan due to a rental property that has a 15. Bought a house that was half of the max we could afford. We do enjoy driving one nice, newer non-luxury medium size SUV, but don't go crazy with super lavish vacations. Some extra cash (if left over) gets dumped into investing. If the market drops more, I will pull back on extra on the house and put that into stocks.
It depends on your age, but the point they are making is putting that extra $400 per month into the market/invest. Of course, that is what history says to do and the future doesn't have to listen.
that will take you in a different tax bracket, you won't have anything to claim at the end of the year. (well not you, me)... im here now. i haven't figured out how to go forth. im retired and on a fixed, which is not a lot monthly, i don't want to pay more in taxes so that's my dilemma...help
Or I am 59 and retired. My house is paid for vehicles are all paid for life is really good.... I have had a few friends pass away in their early 60s. With a lot of money in their 401ks and the stock market in general. They never got a chance to retire. I believe the people get a little caught up with money in the bank and don't want to spend it because they want to make more. Live life and be present.... 👍
Death hits us all, you never know. but you should also plan to live a long time, worst comes to worst, you can leave a big charitable donation to a cause you care about.
We paid our house off in February 2016 after 9yrs and many told us we made a huge financial mistake. My wife was diagnosed with breast cancer at age 33 and unable to work six months later. I will never regret my decision.
@@ToOpen6seven Doing well. After several months she was able to return to work and we continue to invest and save what we would have put towards a mortgage. Thank you.
Life has taught me that you can make plans, but things don't always go as planned. The good thing is that regardless of which you choose, they are both good choices.
My dad passed when I was 11 years old. Our home was mortgage free. My mom applied for survivors social security benifits for me, my brother, and herself. I believe Shelia's biggest problem was adjusting her life style. I bet not paying off her mortgage would have ended up in a worse situation. By paying off her mortgage, she realized early that she either needed to adjust to a lower standard of living or get a job.
I agree. If your a certain age (non retirement) work is kind of a requirement. A part-time job would allow for the widow to cover those monthly expenses.
You guys have made a good decision by breaking these down into smaller segments, instead of hour-long episodes. Much easier to pick off in smaller bites.
We try to offer something for everyone. Highlights for the short attention span and full shows for those that want access to all of the entertainment 👍
There is no price tag on peace of mind. -Zac Brown Pay off your mortgage hyper early (1-5 years). Then take those payments and invest. Let the market pay you...not you pay someone else.
@@isaacsubias7390 It doesn't eliminate all risk. There's the risk investing the money would've gotten a better return than what you save in mortgage interest during those 1-5 years. I'd sure hate to leave money on the table.
@@isaacsubias7390 It doesn't eliminate the risk. You cost yourself some massive opportunity cost by doing that. It's all risk vs reward. It's fine if you choose lower risk but don't act like you get the same reward for it.
Paid off my mortgage early when I inherited some money. Big weight off my shoulders especially since I had a job I was unsure of my future in. We took the money we would have had to put toward our house payment and were able to cover other expenses and put more away for our retirement. We were able to pay extra into our rainy day fund for emergencies and could have used our homeline credit account if we really needed to. This gave us a great peace of mind that we would have never had otherwise. Some decisions in life need more than just figuring the math.
Risk reward calculation, not a guarantee. Historically a 10% return versus avoiding a 3-4% mortgage. I take the long view and am young enough to not be so risk averse. Worry about paying off mortgages in your 40s-50s.
The only variable you forgot to include in the equation was JOB SECURITY... I rather pay-off my mortgage early and invest a smaller amount. Once I’m done with my mortgage, invest the mortgage payment plus the small investment amount. For me peace of mind is KING!!
I don't think they ignored that at all... The first bit was about liquidity, which means having cash to spend when you need it in case something in your life happens such as getting laid off. Paying the mortgage off early can leave you illiquid if you don't have funds elsewhere to draw from.
Being House Rich but cash poor can be a huge issue if you get hit while still paying off that mortgage. You actually are concentrating the risk during your mortgage years, so if you get hit with job loss then, you might lose the house and those transaction costs will hurt you.
Great video, but people really need to realise that a long term mortgage (e.g. 30 years) is only a good idea if you are investing the spare money you have! Not good if you stretch to a 30 year just to buy more house
Yeah I was thinking about what if the person gets sick and can’t work. But if this was me and I couldn’t afford to invest and pay 15 yr mortgage, I would do 30 and pay extra toward the house while also investing some.
Also this woman no longer has a house payment. There’s her money for school supplies! Can’t eat the house but you get to spend what you’d otherwise shovel over to the bank!
@@ashleyjones5396 That's exactly what I'm doing. It's not sexy but the benefit I get psychologically is profound. If I continue my plan, Ill pay off the house in 10 years and will have the option to end it sooner if I want to. All the while, still doing my 14% + 5% match and utilizing my brokerage account on the side.
@@jvaldez5 "Who saves like this in real life". About 10% maybe 15% of people who enjoy building a portfolio and take pride in it. in other words these guys are speaking to a niche group but are acting like they're speaking to a majority of people.
I’m investing 40% of my income at 37 plus a pension. Paying off my mortgage early now is a diversification play, especially because I feel like the current market is overvalued and is being propped up by the fed. My goal when I retire is to live off the pension (assuming it still exists or hasn’t been hyperinflated into being worthless) and to stay invested and not de-leverage. Paying off debt has added value to me because it is an act of defiance to our debt based system that rewards debt and punishes savers. As Americans we would have a visceral reaction to price controls yet we allow exactly that when the fed sets the price of debt through interest rates.
rgarri6396 I honestly might not be, mathematically speaking. But I’m making an informed decision and willing to accept the consequences for better or worse.
Once you pay that house off and become debt free it’s freedom! You go to work because you want to not because you need that check to pay a bill. Vacation comes up and you won’t worry about missing work. I’m about 2-3 years out from being debt free, depending how this economy goes. I’ve also been out of work since March and a paid for house would come in pretty handy right about now.
Exactly. This is my case too. I’m making my portfolio less risky by paying off mortgage debt. Mathematically (with no major hiccups) it’s probably doing it wrong. I know that life has hiccups and paying off debt gives freedom and stress relief.
I know you guys are friendly with Dave Ramsey. As he would tell you, your outlook on life changes dramatically when you are debt free, especially being mortgage-free. But let's stay focused on MATH. When I do the math, it would take 174 months of "investing the difference" to break even with the 180 month (15 year) mortgage. You have to remember that the interest you save by taking a 15 year mortgage is money IN YOUR POCKET (after tax dollars), so those who are taking the 30 year and "investing the difference" have to earn 15-20% more than the "interest saved" to account for the Capital Gains tax to also end up with "after tax dollars". So it's not just about "account value", it's also about account value "after taxes". This dramatically reduces the delta between the 2 comparisons, and Melissa doesn't have as much money as you think she has. Mathematically I do believe she will come out ahead, but the difference isn't worth the risk of a downturn in the market, which is certain to happen over the course of an additional 15 year investment window.
Right? At least if you are broke with a paid for house it's one less huge thing to worry about. At one time and it was nearly 50% of our take-home pay. Its not anymore but image having 50% .more money to start businesses, save, buy rentals whatever. We have a couple rental units already that don't have mortgages and only have a mortgage on our primary with 50% equity on a 15 yr. in our late 20s and that is our plan is to save up for rentals and either pay cash or put a large amount down to maintain excellent cash flow.
I did not do Dave Ramsey method. I did not know who he was when I was doing all this stuff. But I am tiring fifty this year and we have a paid off house, 1.5 million in our combined tsp acvounts, two federal pensions and social security, 213k is oldest kids college account and 168 K is our 12 year o!d's account. No credit card debt and no student loans. I think there is something to say about being debt free and having financial assets. It is a slow and steady wins the race.
Seriously, all you government haters. If it was such a sweet deal. Why did’t you apply? My husband and I both have masters degrees and I a statistician and my husband is a cyber security engineer. We could have made as much if not more in the private sector. Don’t assume all federal employees don’t work hard, don’t have marketable degrees and could not get similar jobs on the private sector
Math looks good on paper. There is no guarantee things pan out as you planned. Thats hard truth of life. People take out historical data and think future will be exactly like this without giving a thought on risks, psychological aspects. A balanced approach between debt repayment and investing is what one should look out for. No debt is a good debt.
Yep - the balance in our plan is that while compounding growth is so powerful and crucial (20-45) focus on investing and growing your Army of Dollars. This is also helpful to have access to additional liquidity while you go through the messy middle of life. Once you are over 45 and have a good foundation to your investment assets- start paying down the low-interest debt. Thanks for the comment 👍
@@davidroush1224 And all investments compound for you. The key is having investments that have higher interest than your debt. If you are unable to beat the interest of a specific debt then you should pay it off asap- otherwise it makes sense to carry that debt and invest the money.
@@thursdaythought7201 - Savings most definitely compound for you. I still say it is better to get rid of all debt ASAP. Doing this allows one to put larger sums of money into the market earlier and reaping the benefits of compounded savings. The friends who maintained a mortgage and invested small left over sums in the market don't have but a small fraction of my savings because I didn't have a mortgage. I put tens of thousands of dollars a year into the market for 15 years before they even paid their mortgage off. Compound interest did the rest.
I’m glad you guys (briefly) mentioned that this scenario is Dave-ish. Because the way the baby steps work is that you only get a 15year mortgage after you have secured 15% of your income to retirement every year. Now granted that will greatly reduce your home purchasing power so there is a trade off. Great vid either wayguys!
I’m a sucker for these videos. If I see something about paying off the mortgage, I click. I don’t care though, I am still aiming to pay off the mortgage in 3 years. I’m on a 15 year fixed 2.375% with $108,692 to go.
I’m in 15 year fixed at 2.75% with 104K left. Gonna aim to get it paid off in the next three years also. After that the house payment can be invested or spent. My choice. But it’s mine!
Low interest mortgage? It's amortized and you pay a ton in interest over the life of the loan no matter what the rate is. Do both! Pay off your mortgage quickly and invest.
I think that mathematically this is true, but it might be one of those things that works best in a test tube. Without a mortgage we've felt emboldened to drive harder bargains at work. This has resulted in an increase in both of our incomes. I'm sure there are other factors out there that I haven't yet experienced. Good show though, worth the consideration.
Paying off my house removed my house note. I can survive so much easier. Even unemployed I can live due to 2 rental properties. Peace of mind is Priceless...
On a different Q&A show, you guys said something that really stuck with me. "Having the money in investments to pay off the house can feel just as good or better than actually paying off the house." I loved that quote. It has really made me think about boosting my after tax account instead of prepaying my mortgage.
This is my EXACT situation. There's a real sense of calm knowing I can pay off my mortgage whenever. Why do I carry the loan then you ask? Sub 3% rate.
Yeah but how many people would really calculating the difference between a 30 vs a 15 year mortgage and actually invest it? The answer is to do both I invest first, then I got the mortgage I do a 15-year but I look at my monthly income to see what I can afford and make sure it's not a big part of my budget. So in your example the 15-year guy should have bought less house or been investing 15%.
It's not really that hard. All you have to do is NOT spend all of your money as the default. If you look at your checking account balance and all you see is money that you need to spend, you're doing it wrong. I guess most people do it wrong, but that's because they're dumb. Instead, just have a set amount for your baseline "emergency fund" balance (e.g. $10,000) and then you just have to regularly move any excess money into your investments. It's not hard. It's just a simple mindset to adopt.
I’m 51. 401k and HSA MAXED out. Our house is on track to be paid off in 11 years. If we drop the 401 back to just meeting the company match (and leave HSA maxed out), we can pay the house off in 3 years and then throw everything back into the 401K til max, and then throw the current house payment into Roth. When we ran the numbers for comparison.... after 11 years we will lose about $39,000 by paying the house off early. However, if you run the numbers on out 2-3 more years... it’s a break even. For us, that’s close enough. We are paying off early. There is risk with carrying debt. And $39,000 difference 11 years from now isn’t enough to entice us to keep carrying the debt. We’ll knock it out in 3 years and never have another debt ever.
At 52 I also ran all of the numbers, its darn near a break even as to savings overall on mortgage vs investing and "assuming" at 8% return: I'll pay off mortgage instead. With their logic (which I dont fault) after you are around 40 or so it doesnt make sense to invest over paying debt because its a wash
My dad passed away when I was 15 leaving a 1500 mortgage payment to my mom and my younger brother, long story short my mom had to short sell the home, still owed 70k for a house that we didn’t owe I had to go to school and get a full time job to help my mom to pay rent and the remaining money. It took as 15 years to paid that off, if my dad would have paid off that house I would have been able to attend to college or university of my choosing but instead I’m just recovering from that harsh reality.
This is a different scenario. What they are proposing is to invest the money instead if paying off the house. So if something happened the investment money should be there. That said that also depends on what happens. A market crash at the time you need the money would be bad.
Thank you Brian/Bo. Love your show, and overall thought process. The only thing I would add in the comparison example I would add is once is mortgage is paid-off, ideally one can afford to take on more risk in their investment (and hence higher returns) as compared to a person who is still in mortgage debt. Will be interesting if we model higher rate of return for the guy after 15years as compared to the person who is still in the mortgage debt. Thoughts?
Many in the FIRE community go Melissa's route. They want the huge portfolio because it still allows them to pay the mortgage and have a ton of money for emergencies and living expenses. Plus, annual inflation decreases the negative impact of keeping the mortgage. $1200/month is like $550/month 20 years later.
What happens if the market goes through a period of no return like 2000-2008, or 1966-1982 the market gained 0% over those time frames. You can’t ever go wrong paying off debt. It’s not always about the best technical mathematical answer. It’s about what make you the most comfortable
Hopefully the under 45 crowd that is investing instead of paying down low interest mortgage debt will be Financial Mutants and buying through that entire 2000-2008 period. Then when markets have their tremendous growth from 2009-2019 the young investor has exploded their wealth through the combination of Dollar Cost Averaging and Compounding Interest. There is a reason we always list ages and stages of life on what you should be doing with your life. I also don’t mind sharing that we are unapologetic about who our target audience is... maximizers who do not struggle with the basics of paying down credit cards and other consumer traps that destroy the components of wealth building 👍
During these times, your quoted returns may well be low/zero but it’s the longer term gain and savings/investment habits that win the game of money….. if you just keep going and investing on autopilot in a balanced portfolio you’ll accumulate a large sum of money….during those lean years you get so much more for the money going in once it does increase…….
@@tkhemjinda I guess it’s all about keeping your emotions in check and forcing yourself to stay the course when your emotions guide you off track…. Great reinforcing posts everyone!
@@MoneyGuyShow So even though you're in your late 40s, your only speaking to the 35 and below crowd? Would be interested in seeing your plan for the 50+ crowd. That is more complicated.
do the 15% for retirement, have emergency fund then extra towards the house. You can't compare stocks that have potential gains or losses plus taxes on gains. so if you pay towards mortgage of say 3.75% it's really more like 5%+ guarenteed rate of return. dont forget to recast, make that lump sum lower your required monthly payment in case you hit a rough patch before it's paid off. what if you loose job, market tanks. you will still be required to pay mortgage bill.
Pat, you touch on something seldom discussed on these forums - recasting. In some situations this is a great option and it was for me. And I agree, paying a 3.75% mortgage is equivalent to 5+% guaranteed rate of return.
I see lots of people commenting that they love the peace of mind they have not having a house payment. This may be a great feeling, but I would argue having enough money saved in an liquid investment account to pay off your home at any moment, compounding in growth every year, is exhilaratingly awesome. You never have to worry about losing your job or ANYTHING when you put your dollars to work, and have built up to a mighty war chest. I could not encourage young people enough to start investing as soon as you can. A simple index fund will return way more than the low interest you pay on a mortgage loan.
@@debtfreeforcanadians9386 Smart... the only and only way I would not recommend that is if you are 50 plus and youre investing in conventional things, iras etc.... BUT if your a sofistacated investor and your are a professional in what your investing in, business or real estate. Then yes you could refinance and invest that money. As long as you have a death plan... life insurance or PLENTY of cash flow to cover payments after you pass away.
What they don't know is that charities and help will help with food and income and health care but help for mortgage doesn't exist. They usually force you to sell the home then rent.
Something is wrong with this whole story of the woman who used life insurance money to pay off her house but then couldn't afford the property taxes. Something doesn't add up here.
I paid my house off in 14 years and it was the best thing I could have done. My son was born with a lot of medical problems just after paying it off. Since I didn’t have a mortgage that made it able for my wife to stay home and take care of him. It also gave us the freedom to not be stressed about making the mortgage payment. I am now investing more.
Becoming debt free was one of the best things I have ever done. That said, the debt free target was age 62 when I retired and went on Social Security. People will tell you you can't live on just Social Security, but I have been retired now for 7 years now and we have not as of yet touched a dime of our investment money. This basically means I don't owe anybody anything and I'm never going to run out of money and I have enough money to buy anything I want anytime I want and I will never be a millionaire. For me there is nothing better that being a debt free retired multi-thousandaire.
Pretty valuable information here. That's why we need to do MONTHLY budgeting, and have emergency funds. Circumstances can change and you can suddenly be left with no money at all
Thank you. Great video. The biggest intangible is the discipline that's required to save extra $556/mo for 15 years no matter what your life throws at you. I would think the percentage of people who could actually pull it off is very low.
@@clumpkin1012 I think it’s a problem when people don’t have any liquidity for anything else .. I personally like around 200k in bank , I am kind of the odd one out .. but it helps me when something happens , recently found my windows all need a replacement .. especially in a neighborhood no one uses vinyl, it’s around 40-50k
I paid off my house at 31 years old with 3.375% interest on a 30 year mortgage in 6 years. No regrets here. Didn’t know about market or really wanted to. Thought it was gambling. But now I’m doing it. After I paid house off I did throw it all towards 457b. Now I’m doing a Roth IRA too
I paid off my house early at the age of 36. I retired from the Military and I know paying off my mortgage is the best decision I ever made. I have peace of mind and that is worth so much more than a mortgage. I think you guys work for the Banks.
Do the Math. It's something you can do for your self (The Banks can manipulate you with Math if you know how to do it your self). Numbers do not lie. While "peace of mind" is great (Its the most important thing to me actually.), its still a feeling. Feeling's lie, numbers do not.
For those taking inflation seriously, consider what your mortgage will look like in 20 years given the changing value of a dollar. For example, if your mortgage is at 3% & inflation is 5%, then the effective rate “feels” much lower in terms of relative purchasing power. Just look at what your parents paid for a house and how much easier it would be to pay that now versus when they bought it. Paying off a debt will be easier in the future because there will simply be more dollars available to put against the same debt load.
Being in the financial industry paying off the house is a great thing but the issue I see is that the "extra" money does not go to anything to build value such as putting a extra $800-1000 into investments, 401(k) etc. It just gets diluted into the monthly bills. Love the channel guys!
I think a lot of folks misunderstand the Dave Ramsey baby steps method. In his system, you only pay down mortgage after you are putting 15% of your take home pay towards retirement savings, savings for vehicles, savings for kids school, etc. It's only after you have done everything else for your future that you put anything toward your mortgage. I think people assume Dave is saying to pay off home immediately after paying other debts, but that sort of skips a lot of steps.
Agree with you that the expected returns from investment are too high for someone investing today. Although if you are starting at $0 you probably won't have much to lose in the crash, which is likely to arrive soon. If, however, you are 45 and already have $750k or more in investment assets, you have a real challenge. But then this chart and this program aren't really aimed at your situation.
I am Melissa. I bought a house when I was 33. Signed for a 30 year mortgage. Bought a cash growing life insurance the next year. When market dipped in 2020. I stopped contributing to my 403B & bumped my contribution in my IUL while paying mortgage without any extra. Today, I have bumped up my permanent LI contribution again since it is an average of 7% there ( at least for the past 20 years). I am encouraged at seeing money grow. My discipline, time & money afforded me to make life insurance an investing account now. I love your shows!
@themoneyguy Love the case studies guys. Only thing I wish is that in the case study Dave and Melissa both contribute 15% from the start. If we are doing a Ramsey approach, then you wouldn’t wait until your mortgage is paid off before contributing to your retirement
She would actually still be ahead, but they are not taking into account the reality that most people with a 30 year mortgage spend the “extra” savings instead of investing the difference. Behavior is really what makes the difference.
Unravller Absolutely! She would still be ahead for sure. Just seems far fetched that someone would wait until they paid there mortgage to begin retirement. And yeah your average consumer isn’t going to invest the difference. They’ll spend on lifestyle. What you aren’t forced to do so often times you won’t do.
seems like the value of the house and appreciation should be factored in, no? Dave had $0 investment at yr 15 but he also has 300000 at least in equity in the house.
Or I will do like Dave, 15 year mortgage, make extra payments on that, as well as invest 25% of my income. Best of both worlds. You never hear people complaining about their paid off house, but a lot of people love to tell you not to do so. Give me someone who paid off their mortgage and regrets it.
The math says in this video that you would be better off investing than paying off the mortgage! That’s what the math say but a word of advice, maths is not life and life has a way of changing the rules. This scenario assumes you have the same job or same level of income for 30 years and no other distractions or bumps in the road will happen! You have to have that commitment for 30 years 15 years more than the first example, that’s a tall order. Your also talking about 25 year old who haven’t even started life yet may not have children yet or been on dream holidays or started their proper careers yet! These examples are assuming the perfect storm which never happens! My advice is pay your debt of as fast as you can also save a little liquidity do a bit of both because life isn’t maths the equations keep changing 👍🏾
Surly if you’ve paid off the house and drastically reduced your outgoings you can still feed the family, pay insurance etc with your much bigger cash flow due to no mortgage?
As others have mentioned, on paper this is all true. The issue is, humans are not purely rational creatures, as much as we’d like to think we are. A 30-year mortgage can encourage people to get a more expensive home since they can afford the payments, which also drives up home prices. A 15-year mortgage, or at least the desire to be able to pay off the mortgage, can lead to choosing a smaller, more affordable home, which entails less stuff (furniture, toys, etc) lower utilities, and reduced maintenance costs.
There are a few assumptions you have made that really skew the results. First, that the person who goes to buy a house decides AFTER they have figured out how much they want to borrow whether they want a 15 or 30 year loan. Second, that the person who goes with the 30 year mortgage is really going to take the difference between the 15 year mortgage payment and the 30 year mortgage payment and invest it. What happens in reality is that people run the numbers on the 30-year mortgage, figure out if they can "afford" the monthly payment amount, and then start looking at homes in the price range that they think they can "afford". And then, even those who start out with the intent of putting that extra cash towards investing are tempted FOR 30 YEARS to use that money for other stuff. I agree with your general view that extremes are bad. People should be buying a house that leaves them enough room in their budget to invest a portion along the way. But if you are investing along the way AND paying off your house early - you've won the game.
Marc R its true, human behavior is on average not disciplined . The only chance here is if the money is sent to an investment account before the person sees it.
Basically live within your means in order to do just that. It's what 8/10 people don't do and don't even put themselves in a position to even throw anything extra at the mortgage or invesments. We can analyze all day long which direction is better, paying off the mortgage faster or investing, but I say doing at least one of those is better than nothing at all. Most people probably do neither
I agree with their point of view that you should wait until 45 to start paying off mortgage debt early. Most people don't stay in the same home that they bought in their 20s or early 30s. The gains in the market would far outweigh whatever interest they saved on the mortgage during that period of time.
You can't eat a house! If you are in a situation where you have nothing to eat....then you can always sell your house! Paying off your morgage gives you so much more money from your income. Its a win win in any situation.
This is a great theoretical problem to work through to see how to maximize wealth, Dave's method is not to maximize wealth, it is to give the most secure path to wealth. There is nothing wrong with your plan, but saying it is apples to apples because at the end of your theoretical lifetime both people have their houses paid off effectively ignores the offsetting variable. It would be relatively the same thing as me saying every year I should get a new 0 down house and have the rent pay off the mortgages by 45 and then have a 5 million net worth by the time I retire. Theoretically that's all fine and good, but you have one thing like a pandemic cut off all rent payments and suddenly that variable of risk becomes a pesky problem. Your plan is a good choice for slightly riskier people who are ok with that for the chance of increased maximum wealth, but I don't believe it is apples to apples as you say.
There are so many variables here that were not discussed. Job security being one of them. What about risk tolerance? Your math looks nice but remember you can not put a price tag on peace of mind. Furthermore...I have never met a person that paid off their mortgage and regretted it. They all describe the feeling of a burden lifted off their shoulders. There really is no right or wrong answer here. It really depends on what a person values the most. Also why does it have to be all or nothing. Why not do both?? Pay down the mortgage and invest? Or at least pay down the mortgage fast in the beginning to save on wasting money on the front loaded interest??
Something most don’t talk about when making this decision, asset protection. When you pay off the house you are free to transfer to a trust or LLC. I personally chose LLC because I have no kids and the cost to protect is significantly lower than a trust for the time being. Also no tax implications from the transfer to an LLC.
In my case I took a 15 yr mortgage, but on a ridiculously cheap house that's a fixer upper with a huge potential to be worth tons more (one of those unheard of situations). I also started investing at a high level early since I didn't buy a home that took a large chunk of my income to make a payment. Not upgrading to get the nicer prettier house has allowed me the best of both worlds and I have a house in the end that's worth a ton and I paid very little for it. Buy well within your means and invest...I don't see why you wouldn't do both.
I'm refinancing at 2.375%. It's below inflation. I'm likely better off if I never pay it off, or pay it off as SLOWLY as possible. Sure, I COULD pay an additional $4000 in principal per month and pay it off in under 10 years, but WHY would I do that? Better I use that $4000 to invest in equities or rental properties. For the rest of my life, I will likely NEVER be able to borrow at 2.375% again. I'd argue that it might even be better to up my emergency fund from 6 months to 12 months rather than pay the mortgage, even if my emergency fund makes only 0.5%, because of flexibility.
Brian, Bo, THANK YOU FOR THIS VIDEO. YOU HAVE GIVEN ME THE EXACT INFORMATION I NEEDED TO MAKE MY DECISION ABOUT PAYING OFF A MORTGAGE IMMEDIATELY, OR KEEPING IT AND CONTINUING TO INVEST. YOU ALL HAVE LIFTED A TREMENDOUS AMOUNT OF STRESS OFF OF ME!!!
Yup, but now we know the market can lose as much as thirty to nearly fifty percent of its value, but if you invested in your home, you still have the same four safe walls and roof, no matter what happens to the market.
That’s why Dave calls it Financial Peace, not Financial Prosperity. Also, as others said, if a financial extravagance comes up, you are much more likely to divert investment funds rather than mortgage funds. Aldo Dave recommends 15 percent invested matched if possible then Roth then deferred then anything else. It is also more tempting to buy too much house on a 30 year because the monthly payment is so low. You’d have to deliberately shop for a 15 year then switch to a 30. Otoh, most of the millionaires in Dave’s study got a mortgage in a much higher interest and inflation period. Of course they paid off their mortgages fast when they had a 30 year fixed at 9 percent that they got in 1986 but in 1997 rates had dropped. I would not be surprised if inflation hits 4 percent and interest rates hit 6 in the next 20 years. That will make people who got a 30 year at 2.5 look like geniuses. After 18 years of 4 percent inflation, you only have to pay half the money in constant dollars.
How does the different amounts of interest paid play into this? For example, after 5 years Dave has paid about $26k in interest and Melissa has paid $37k. And over the life of the loan she pays about $87k more in interest than Dave. Isn’t that essentially borrowing money at 3.25% to invest it in the market?
Mathematically, the money guy approach does make sense. However, it is exactly as you described… You’re in essence leveraging your house in order to invest in the market. Each individual has to make the determination if that is something they want to do.
Yes, I'd rather they include the mortgage interest paid by each. Double those mortgage interests rates to 5.0% and 6.5% (like they were years ago) and Melissa would ultimately pay $204k more in interest over Dave. Interestingly enough, she still would come out ahead, just not as far.
I totally disagree. If you have an opportunity to pay off your mortgage, do it! You can try to get sophisticated with the math all you want. But the weight of not having a mortgage is unbelievably rewarding. People, like myself, that pay off their mortgage early didn't do it because of the math. We did it for the emotional relief. Paid my 30 year mortgage off in 8 years. NO REGRETS! I've deployed those funds to rental properties, and have completely flipped my cash flow.
The widow missed one thing that she needed from the Baby Steps. The emergency fund of 3-6 months of expenses. Or even more simply, she made a move without knowing all of her future expenses.
This is a right message to younger investors. No need to be so gung-ho to pay off the low fixed mortgage interest (like 3 something % as of 2020). If you are young then have 30-year mortgage and use extra saving for other investment vehicles (401K, Roth IRA, HSA....). Only have 15-year mortgage if you make significantly more so you can do both at the same time : pay off mortgage faster while invest into investment accounts.
Ok so in your scenario i ran the interest paid to the bank, Melissa paid a total of @$136,000 interest where Dave paid a total of @$48,000 in interest resulting with Melissa paying @$88,000 more for the same house. So how does that factor in to her $64,000 surplus?
I paid off my house because I had a horrible fha loan and terrible credit I only owed 100k on it and we just starts making triple payments and paid it off early 30 year loans are a joke
Also was it calculated on how much more interest Melissa paid overall in a 30 year mortgage vs Dave paid in 15 years? I just think with 15 more years to pay off mortgage there more time to buy stupid things and make bad decisions and spend more money when you have that chain and ball called debt attached to your leg that you will be dragging around for years and years. And remember 15% is Baby Step #4 so there is investing too
Kind of like you guys said at the end of the video, I think the decision whether to pay off a mortgage early or invest the difference depends more on your mental state of mind than getting the absolute best return on investment possible. If you're at the point where you are deciding on whether to pay extra toward a mortgage loan principle or invest, you can't go wrong with either. I typically don't listen to Rasmey advice and as a former fund accountant I cringe every time he says the word mutual fund, but one of the absolute best things I think he has ever said was, "you would never borrow on a paid for home to invest, so why keep the mortgage?"
I paid off my mortgage back in April, at the age of 43. Debt free at 43, with 6 months expenses emergency fund, and we’ll on my way to being a millionaire by 55. For me, the peace of mind and security of being debt free made the decision right for me. Might not be right for everyone, and other people in my position might have made a different decision. I’m loving the debt free life!
I bet. Big congrats to you. We’re the same age but I’m far from paying my house off. I’m considering selling and paying cash in a less expensive area. Would be awesome to have no mortgage, leave corporate America, and get a job in a music store 💪🏻
I wish folks listen to the Money Guys more than Dave Ramsey. People seemed to be drawn more towards no nonsense type of rant (of Dave) than math and logic (of the Money Guys). Yes debt is bad... in fact very bad but not all debts are created equal. A mortgage debt tends to be low around 3-4%. Whereas market returns are 10% over 30 year period. So not putting money in the market means you are losing out on the magic of compounding. Remember that in compound interest equation, time is in the exponent. So you want to start investing as early as you can
Not the folks listening to my content. The Money Guy Show is for Financial Mutants (maximizers)... if you have mountains of credit card debt and no money left in the account at the end of the month we might be not your best resource until you get the basics covered 👍
If people are disciplined enough to pay their house off within 10-15 eight years or whatever then I'm pretty sure they're disciplined enough to invest 500 regularly
Paid off my house with an inheritance. Never regretted it as anxiety from being made redundant (which happens a lot in my industry) was always on the back of my mnd. In the meantime my house which I purchased for £360,000 has gone up to £590,000 in value. This does not include the value added due to the extension we saved for. So I get the point of compound interest growth but if you have the chance pay off your mortgage. Also in the UK we can only put £20,000 a year in an ISA and £40,000 in a pension. We have a thing called Premium Bonds with a maximum of £50,000 but this is less tha 1% return. So the point I am making is I saw the inheritance as something that I didnt earn or save for but bought me a house. Since then I have used the mortgage payments to invest.
You should really keep the Rate of return constant to show true value. Also compounded inflation takes a massive chunk out in this math. Maybe I am missing something?
inflation doesn't change the math; It just reduces the purchasing power of those funds as you get older. The ROI changed in the 20s,30s,40s, etc because people generally move towards lower risk investments as they get older.
I can’t think of one person in my network that could do this at 25. Buy the house or make the excess investment. And I’m on the high end of your 401k averages now
Exactly!! It’s unicorn advice and unicorns don’t exist. No one that I know could make a 60k payment at 25 or made six figures at that age. What’s more is those that started making six figures much later didn’t put 20% down either. A 300k home at 25? Are you crazy? This is the problem with financial advice it usually targets a “certain” audience.
