I Stopped Investing and Paid off my Mortgage. Here's What Happened

⚠️ Attention Homeowners and Future Homebuyers: Ever found yourself stuck at the crossroads of making one of the biggest financial decisions of your life: Should you overpay your mortgage or should you invest that extra money elsewhere? Well, you're not alone! This is a dilemma that many of us face, and the stakes are high. Making the wrong choice could literally cost you thousands of dollars.

📚 About This Video:
Today, we dive deep into the controversial topic of whether it's more beneficial to Overpay Mortgage or Invest that extra money. You won't believe what the numbers reveal. And no, this isn't some clickbait video that leaves you hanging. I crunched the numbers and broke down the pros and cons of each side, so you can make an informed decision. So let's answer the burning question: "Invest or Pay Off Mortgage: What's REALLY the Best Choice?"

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STUFF I RECOMMEND!*

🧮 Key Takeaways:
1️⃣ We look at different mortgage scenarios, with a focus on the current 30-year fixed mortgage interest rate of 7.18% in America.
2️⃣ We run numbers based on a mortgage amount of $300,000 and the possibility of paying an extra $200 per month on that mortgage.
3️⃣ We compare what happens if you take that extra $200 and invest it in the stock market instead, assuming a 7% rate of return.
4️⃣ We dive into the long-term consequences, exploring both scenarios until the year 2053.
5️⃣ And finally, we expose a critical factor that most people miss in this debate, one that could change the game entirely for you.

📊 What's Inside:
00:00 - Introduction and Background Research
00:17 - The Rising 30-year Mortgage Rates
00:28 - Setting Up the Calculation
00:41 - The Shocking Results
01:01 - Crunching the Numbers
02:07 - The Two Scenarios: Overpaying Mortgage Vs Investing
02:21 - The Financial Gain in Both Cases
02:43 - A Critical Factor You've Overlooked
03:12 - What Happens in 2053?
03:42 - Accounting for Inflation
04:09 - The Power of Financial Freedom
05:51 - Pro-Mortgage Vs Pro-Investment: Pros and Cons
09:07 - FIRE
10:52 - Compound Interest

👇 Links & Resources:

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💬 Let's keep the conversation going! What's your take on this debate? Do you lean more towards overpaying your mortgage, or do you think investing is the better route? Share your thoughts in the comments section below!

#OverpayMortgage #InvestorPayOffMortgage #FinancialFreedom

🚀 Get Ready to Take Control of Your Financial Future!

Thank you for watching, and I'll see you in the next video! 👋

*Disclaimer: Bob is not a financial advisor. Please contact a professional financial advisor prior to making any decisions. Some of the links and other products that appear on this video are from companies in which Bob Sharpe earns an affiliate commission or referral bonus. Bob Sharpe is part of an affiliate network and receives compensation for sending traffic to partner sites. The content in this video is accurate as of the posting date. Some of the offers mentioned may no longer be available.

[brycehedstrom]

We lived frugally and paid off our mortgage 22 years early. Best thing we ever did. Expanded our business, retired early. Saving and investing. Seeing our grandkids. Volunteering at church. Peace of mind.

[robb]

I paid off my mortgage and it was the best thing I have ever done for myself. The peace of mind is priceless.

[BudgetingTheBacon]

Just paid off my mortgage Aug 9, 2023! I still can’t believe it. I’m going full force on investing now.

[zestpeet]

At 25 my wife and I had a stack of cash from working and saving diligently. Put 43% down on a cheaper home in a low cost of living area. About six months later we received a letter from our mortgage holder which showed how much we paid in interest vs principal. I was so upset at the difference that my wife and I walked into the credit union the very next day and paid our mortgage off. I wasn't about to get scammed. Fast-forward six years and we're happy to be mortgage free and chose not to upsize our modest home. Sometimes I wish I invested the money instead, but having no home payment allowed us to both change industries and completely change our life (soo much better work-life balance!). I'm a proponent of paying off mortgages early, because of the freedom it provides! I don't care if you have a 2% interest rate, I'd rather not be forced to work for that payment any longer than needed :)

[potatoskunk]

Some issues that undermine this analysis:

First, the TLDR version:
1. Don't adjust your projected rate of return from your investments to reflect inflation unless you also apply the same inflation assumptions to your mortgage rate.
2. The results of your analysis are sound with the mortgage rate and investment rate of return assumptions you used, but a lower mortgage rate or higher investment rate of return would lead to very different results.
3. Being mortgage-free early is valuable, but it's also valuable to have investments that could be turned into cash in a pinch without taking on new debt.
4. You didn't cover the tax implications - the tax hit on investments, or the tax deduction for mortgage interest (although the second is covered in a follow-up video).

Now the long version:

1. You took the investment return from 10% to 7% to reflect the effect of inflation. It is very important to understand the effect of inflation on your investments. In 2053, you may look at your portfolio value in dollar terms and have made 10%, but if inflation averaged 3% over that time, your return in terms of purchasing power was more like 7%. This is what you were trying to capture by reducing the presumed rate of return from 10% to 7%.

However, you did not make a similar adjustment to the cost of your mortgage payment. You take out your mortgage in 2023 dollars. But you get to pay it off, not with 2023 dollars, but with 2024 dollars, and 2025 dollars... and eventually 2053 dollars. Those future dollars will probably have a lower value than 2023 dollars. Inflation eats away at the value of your mortgage just as much as the value of your investments. So if you have a mortgage rate of 7% but inflation is 3%, your effective "real" mortgage rate is actually just 4%. In dollar terms you're paying 7%, but the net effect on the purchasing power of your net worth is 4%.

By applying an inflation adjustment to your investment return but not your mortgage rate, you're not actually comparing apples and oranges.

In fact, for those who have a low mortgage rate (some people have a rate below 3%), if you assume inflation of 3%, their "real" mortgage rate after inflation may actually be negative, since inflation is eating away at the value of their mortgage faster than the interest builds up!

2. You assumed a mortgage rate of just over 7% - greater than your assumed investment rate of return. This is what drives your results: your mortgage rate is greater than your assumed rate of return. But for those who have a much lower mortgage rate, this analysis will get very different results. For those who got in when the mortgage rate was 2.5%, 3%, 3.5%, if you can invest at 7%, you're absolutely better off doing that than saving 3.5% or less.

3. You talked about the freedom of being mortgage-free, and this does have value. You addressed the alternative of using investments to pay it off early - and the risk of a market downturn right when you want the cash. Those were all good points. But there's another point to be considered: when you make a payment on your mortgage, that cash is no longer available to you. In terms of your net value, it's reducing your debt, which is good. But in terms of having cash on hand to cover an unexpected expense, it's gone. Investments, on the other hand, can, if necessary, be turned into cash to cover an unexpected expense; if that happens during a market downturn it's going to hurt, but you still have the option to do it instead of taking on new debt.

If you pay off your mortgage but don't have much cash on hand, any unexpected expense will be painful and could force you to take out new debt. If you have investments and you have an unexpected expense, you could sell your investments. Of course, a good emergency fund will reduce this risk. But if your emergency fund gets overwhelmed, having assets you can turn into cash is good.

4. Taxes. This can cut both ways.
If you do not invest in a tax-advantaged account, taxes will reduce your rate of return. A 7% rate of return might look more like 5% after taxes, depending on your tax bracket. So the nominal rate of return you make will probably be cut down somewhat by taxes.
On the other hand, mortgage interest is tax deductible. If you pay off your mortgage early, you cut your mortgage interest payment faster, which means you reduce your tax deduction - and therefore increase your tax liability. Paying only the minimum mortgage payment, on the other hand, will keep that mortgage interest payment and the resulting tax deduction higher. But - many people will be taking the standard deduction, so this won't help them at all.
These two effects can offset each other. The followup video linked in the pinned comment gives a good explanation on how the mortgage deduction may not help you. But if it does, this can also help tip the scales one way or the other.

One further note:
You know exactly what your mortgage interest rate is. If your mortgage rate is 7%, every extra dollar you pay on your mortgage will save you $0.07 per year.
Your rate of return on investments, on the other hand, can be variable, depending on what investments you make. (fixed-rate bonds are predictable, but give a lower rate of return.) The S&P 500 has historically averaged 10% in the long run, but there's no guarantee this will continue into the future. If your mortgage rate is 7% and your investments make 5%, you would be better off paying off your mortgage. If your investments make 20%, you should be investing (but good luck maintaining a 20% rate of return over the long run). In the long run, 10% (before taxes) is probably a reasonable prediction, but it's not guaranteed.

[freedomring]

not having any debt is peace of mind that you simply can't put a price tag on.

[reptoid]

I’m two weeks away from paying off my second home at 2.75%. With both houses payed off I’m going full stern towards future investing!! It feels great to be mortgage free at 39!!

[MikeyAnalog]

I paid off my $187, 000 mortgage in 3 years and 3 months. I was investing 15% of my income into retirement but stopped all investing for the last 8 months as I was getting closer to paying it off and I set a goal to pay it off by my 37th birthday. I ended up beating that goal by 3 weeks. I have literally zero debt now. Words can't describe the feeling of peace you get when your house is paid off and you have no debt whatsoever. Now I'm dumping a ton of money into retirement and purchasing several items I was holding off to buy until the house was paid off. I have a couple pretty cool vacations planned for this year too. I will add that I have been a Dave Ramsey listener for many years and his show was a huge motivator for me. Life is great!!

[martinrbookermb]

Its a long debated argument but ultimately paying off your mortgage holds much more fringe benefits psychology. Ive done both and once i paid off the mortgage my whole attitude towards work and life in general changed for the better and savig and investing grew expediency due to this change in mind set. You can be bolder and more aggressive once you know your home is yours and it encourages you to grow more like you probably wouldn't when you have a mortgage hanging over you.Great video.

[vintagecrazyjay]

Math is fun. Bottom line: Paying off my mortgage gave me peace of mind which I find absolutely priceless! I followed Dave Ramsey's advice, walked through the baby steps, read Total Money Makeover and went through Financial Peace University. Wasn't easy, but TOTALLY worth it. Cheers!

[danieldpa]

Even without a reasonable saving on intrest, a debt free home is priceless.

[ccnyc]

Paying off my mortgage gave me an ease of mind, which is priceless. Not paying off my mortgage feels like I am borrowing money (paying interest), hoping I have a positive return in addition to my interest rate.

[eplugplay]

Interesting way to calculate between the two. For us we paid off our mortgage early and took us 8 years of living below our means and putting all yearly bonuses and everything at our mortgage. At age 38 I became mortgage free. Since then I have been maxing out my 401k and Roth IRA and having 0 debt of any kind we built up a 2 year emergency fund in case we lose our job. So glad we did it because peace of mind definitely beats everything as we feel semi retired and no more anxiety of losing our jobs! Also time is the most important to us, instead of 25 years later to be in this situation, we can enjoy it now! It also allows us to save 35-40% of our income and with two kids and funding their 529s it is an incredible feeling!

[yannip]

There is nothing worth investing at this time of uncertainty and volatility. Paying off the mortgage, even at low interest, is FREEDOM - PRICELESS!

[alphadraconis]

The peace of mind, the ability to live on a single income if needed, the ability to say FU to an ahole employer etc etc biggest game changer, sure investing should be the next step but paying off the mortgage is step one on unlocking the cheat code of life!

[gabeg]

We paid off our mortgage on August 14th and for me the biggest thing is the freedom. Now we can invest and grow right before retirement or at least that’s the plan. 😊

[formula]

Finally, a financial content creator that I agree with, besides Dave Ramsey, that says it is better to pay off your mortgage than invest the money.
I am making crazy extra principal payments (I made 5 principal payments for September), and I am scheduled to pay my mortgage off in 4 17 years off my 30 year loan by paying it off in 13 years. I started off slow in the first few years, but then my pay started growing, and now it is like a game to throw as much money I can at the mortgage and watch the balance go down.
My goal is payoff before my 59th birthday.
Great content....you got my sub.

[johnouellet]

The other thing to consider is that when you get close to paying off the house, most people paid off even quicker. Not only do you have more money to invest, but you have more money for savings which gives you a more secure future. It’s way better to pay off the house then to invest.

[drcatrinaking]

The freedom and confidence gained by not having a mortgage can also increase your income. You'll be better at negotiating and creating additional income streams when you're not desperate to make payments.

[RatherBDiving]

Many folks have interests rates sub 4% (2.9, 3.1, etc.). I suspect if you ran your calculations with one of these mortgage rates it would show a different story. It might we worth doing a follow up video and showing the math based on various mortgage rates, so that folks could see at what point it is better to payoff vs invest.