I have been doing a lot of videos about real estate investing lately.
Since I just sold one of my properties and ended up
paying off a mortgage on another property,
so I thought I would keep with that theme and stick with real estate.
But in this regard we're going to be talking about whether or not
you should pay off your mortgage early or if you should invest that money instead,
so that you can make sure you are making your money work for you the best way possible.
I am Tiffany Thomas with wealthytiffany.com
and I achieved financial freedom and became a millionaire.
If you are looking to do those things as well,
hit that like button and hit the subscribe button and we're going to dive right in.
A friend of mine actually just asked me this question.
He was wondering if he should pay off his mortgage early
or if he should take that extra money and invest it in the stock market instead?
It can be a really hard question to answer because it's not just about the numbers.
There are three main things that go into figuring out
whether or not you should pay off your mortgage early or invest that money.
The first one is, the numbers, you want to know
is it worth it to invest that money instead of paying off my mortgage?
Because if it's not then you don't want to do that.
And the second thing is, what are your long-term goals?
What is it that you are working toward? What do you want to achieve with your finances?
And then the third item is what really feels best to you.
Because like I've said before, personal finance is a lot more personal than it is finance.
It's not always just about what the numbers are saying,
but of course since it is finance, we do want to know what the numbers are telling us.
That's the first thing we're going to talk about. I want to share an
example with you about paying off your mortgage early
because interest rates have been really low recently.
So it may be that you have a really low interest rate.
So you're not paying that much in interest over a period of 30 years,
even though, I know when you add up the total amount of Interest,
it is quite a lot of money,
but when you are looking at it in the long-term scheme of things,
having that lower interest rate really does save you a lot of money.
We are going to take a look at a calculator online and I've chosen to use bankrate.com.
But there are a ton of mortgage calculators out there that you could use.
When I went to bankrate.com, they already had some numbers entered into their calculator.
So we are actually going to use the numbers that they had in there
because I feel like they're pretty average numbers right now.
Okay, we are going to say that we purchased a home
for three hundred and thirty thousand dollars
and we're going to say that we had a down payment of 66,000, so that would be 20%.
And we're going to say that we took out a 30-year mortgage
and our interest rate is going to be 3.13%.
And then when we take a look at that, our monthly payment,
and this is just principal and interest, is $1,131.
So if we don't pay off our mortgage early and
we just make that minimum payment each month,
then the total amount that we are going to pay
in our mortgage is going to be $407,535.13.
So, we are paying over 70 grand extra
just as interest. If we do not make any extra payments on that mortgage.
And if you are wondering why the mortgage payment does say
$1,414 instead of $1,131, this is also including the property taxes and probably insurance.
But let's say you have an extra $300 every month,
that you aren't sure what to do with. Should you put that
toward your mortgage and pay it off early,
or should you put that in the stock market and invest it?
So, let's see what happens when we add an extra $300 to our mortgage payments.
So we'll type in $300. And this will be every month that we’ll be paying the extra $300.
So you can see our mortgage payoff
date has changed to December 7th
2042. And before it was in 2051.
So, let's take a look and see exactly how much we will be saving if we have that
extra $300 per month toward our mortgage payment.
So we would have a total balance that we would pay of $360,496.85.
So if we take that $407,535 - $360,496
then we would have a difference of $47,039 that we would be saving on our mortgage
if we put an extra three hundred dollars every month toward that mortgage.
And since we are now paying it off, nine years earlier,
that means you could take that extra $300,
that you were putting toward the mortgage
and put it in the stock market and invest it for nine years.
And if you wanted to get even crazier and you wanted to invest that mortgage payment,
that $1,131, for the remaining nine years that you would have been paying
that mortgage payment if you had not paid any extra.
Then we can take a look at a compound interest calculator
online and I just used Moneygeek. So we'll take that total contribution every month,
that $1,431, the 300-plus our mortgage payment for an average rate of 10% return.
And the reason I'm choosing 10% is
because that's an average return for investing in the US Stock Market.
So you could invest in an index fund
or an ETF that follows the total stock market
and get an average return of about 10%
and then we're going to do that
for the nine years since that's the number of years that we would have saved by
adding extra to our mortgage payment each month.
So over that nine years, we get a total of $249,071.
So that is the first part of the example, if we take that extra 300 that we have every month
and we put it toward our mortgage and pay it off early.
And then we invest that amount, that 300-plus our mortgage payment,
for the remaining nine years that we would have had that mortgage.
Then we would have an extra $249,071 and our mortgage would be completely paid off.
And then the second part of the example that I want to show you is,
if you were to invest that three hundred dollars every month into the stock market,
and we are going to use that same 10% return.
So we are going to change this contribution to $300 per month.
And then we're going to change the nine years to 30 years.
Since that is the length of our mortgage.
And if we were to do that for a period of 30 years, we would have a total of $678,146.
That is quite the difference of paying off your mortgage early
and then just investing for nine years.
That is a difference of $429,075.
If we are basing your decision strictly off the numbers
then it definitely makes more sense to strictly invest that extra money that you have in
the stock market instead of paying off your mortgage early,
but like I mentioned before, that is not the only thing that we want to factor in.
We want to know what our long-term goals are.
For example, do you want to be a real
estate investor, and have multiple properties?
Or do you want to invest in someone else's business?
Or maybe you want to invest in your own business. For me,
personally, I did want to have just a few properties.
I'm not looking to have a hundreds and thousands of properties.
So for me, I ended up waiting to pay off my mortgages,
until I had purchased the amount of properties that I wanted to purchase.
So I had four properties and I could have easily paid off that
first property sooner than I originally did,
if I didn't plan to buy more properties. But since that was the plan,
I didn't want to have that money gone by paying off a mortgage.
I wanted to have access to that money so that I could easily buy a house when I wanted to.
And once I had those four properties, I did end up paying off
that first property that I had purchased.
And then, I recently sold one of my properties and moved into one of my rentals.
So I am down to three properties and the profit that I made by selling my house
that I was living in, I actually put that toward
my other mortgage and ended up paying that mortgage off.
So now I only have one mortgage left,
but that is totally fine for
me because I wanted to decrease my expenses because by selling my place,
I was decreasing my income because I didn't have as many renters now.
So for me, paying off the two mortgages ended up working toward my long-term goals,
and there is also a way that you can borrow money against your
investments, against your brokerage account
and put that toward real estate.
I’ve talked about this in one of my previous videos.
I'll leave a link to that above and below in the description.
You can check that out later on.
So it doesn't have to be one or the other, strictly the stock market or real estate.
You can create a combination
or maybe one of your long-term goals is to strictly invest in the stock market
and just have the house that you live in.
And then once you're retired, you can live off of your stock market investments.
So in that regard, it makes sense to put more money in the stock market.
And this brings us into item number three,
which is actually, how do you feel about paying off your mortgage early because while yes,
if you want to live off of your stock market investment,
you still may have some anxiety about having a lot of debt, about having this mortgage debt.
Maybe you are someone that is very anxious about having debt,
and it makes you lose sleep at night. And if that's the case,
then you would want to pay off your mortgage early
so that you can actually get better sleep at night. Or maybe you do have rental properties,
but you are over-leveraged.
And if something like the pandemic were to hit again and you would lose that rental income,
then it could be a possibility that you would lose your properties as well,
if you weren't able to pay the mortgages on them.
So by paying off your mortgage,
you know, for sure that you would at least have your primary residence,
if things were to follow apart. Or like we talked about before,
if one of your long-term goals is to invest that money in something else.
Then you may want to have access to that cash rather than paying off that mortgage early
and then trying to refinance when it may not be the best time.
Maybe you have lost your job or things
just aren't really good in the real estate market and you're not able to
refinance for as much money as you would like to at a low interest rate.
So there are just a few things that you want to consider
when you are deciding whether
or not to pay off your mortgage
early or to invest that extra money that you do have in the stock market or in something else.
It's a very personal decision. So there is not a one-size-fits-all answer,
but I wanted to break it down for you and show you the numbers that yes,
most likely, you will make more money by investing that
extra cash that you have in the stock market,
but you don't want to just focus on the numbers. You want to consider
what your long-term goals are
and is by paying off your mortgage going to help you reach those long-term goals,
or is it going to take you longer if you're paying off your mortgage early?
And then also consider your own feelings, if you have high anxiety
about having debt and you are constantly worried about your mortgage,
then pay it off early. And as a side note,
if you were looking to manage your money easier,
I like using a free app, it's called Personal Capital.
I will leave my referral link below in the description and you can check that out.
It makes it really easy to hook all of your financial accounts to Personal Capital
and then see your full financial picture in one place.
Comment below and tell me what you are going to do with your mortgage.
Are you going to try to pay it off early?
Or are you going to invest extra money in the stock market?
I am curious to know. And if you found this video helpful,
please hit that like button and share it with someone else
who is wondering what to do with the extra money that they have.
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Thanks so much for watching. I'll see you in the next video.