Paying more into your mortgage is a tricky question. Let me break down all the reasons why and why not. .
How’s it going everybody this is beat the bush today let’s talk about paying more into your mortgage in order to save on the interest if you’re lucky enough to have a mortgage and if you’re lucky enough to have enough money to pay more into your mortgage then this is a really good headache tab because that means you’re actually cash positive and that you have saved
Up plenty of money you paid off all your credit card debt all your student loans and then on top of that you have an emergency fund six months to one year two year three year whatever you’re comfortable with and then you on top of that you have some money on top of that and you want to pay more into your mortgage which is good let’s use my favorite example of the
Average home price which is one hundred eighty eight k so let’s just round that to two hundred k you put 20% down which is $40,000 that you’ve saved up in order to put a down payment into the home and then you have fairly good credit so you get 4% thirty-year fixed-rate loan here and so right when you buy the home you owe the bank $160,000 now though these numbers
You can multiply by two or three or four depending on the size of your home if you have a $800,000 home which is what it is around here in the bay area then you multiply all these numbers by four and so you owe the bank 160k a year every single year you have to pay 4% roughly in interest you just multiply that because it’s roughly accurate if you just do it one
Year one percent on this amount that you owe is 1.6 k you times that by four which is six thousand four hundred dollars at you pain so all this money that is wasted in interest because you have all the bank some money you might say oh yeah this amount you can deduct it but you still paint three quarters of that out of your pocket wouldn’t it be better to not pay
That or pay a reduction of this amount now i’ve come to the point that if you’ve been getting a job and you’ve been working and paying off being financially responsible you should have had no credit card debt and you probably paid off all your student loans too and then perhaps you have a bunch of cash saved up too and that’s enough for your emergency fund and then
Some and then you’re like oh yeah i got some money i don’t know what to do with it i want to you know invest in something maybe you invest in the stock market maybe you invest in this pea to peer lending thing that i don’t recommend and then you start to think about if i should just pay more into the mortgage when you put money into your mortgage you automatically
Know you’re not going to pay that 4% interest anymore for example if you put in ten thousand dollars here you’re gonna know for sure that you’re going to save four percent of $10,000 in interest just the first year and it just keeps on compounding after that you’re going to save every single year thereafter until you pay the loan also it becomes a very good deal
And at the same time it becomes not a very good deal because it’s only 4% the thing you have to know about paying into your mortgage is that once you put money into it it’s very hard to take it back out it’s kind of like locked and locked dead in there until maybe you sell the home or maybe you get a second mortgage or something or like do some sort of cash out
Refinancing or something so once you put it in there it’s kind of like it’s a one-way street and it’s very hard to go the other way so if you’re going to put money in there you gotta make sure you paid off all this stuff that our higher interest on top of that you have a lot saved up because you’re for certain that you won’t need this cash in the future let’s say
You have $10,000 on top of the emergency fund whatever amount you’re comfortable with the question comes on – can you make more than your mortgage interest rate if you take that $10,000 and invest it somehow if you have extra cash around and you’re not doing anything with it and you know that you won’t be doing anything with it and this is the amount that’s over
Your emergency savings okay then it might be good to pay into your mortgage because it’s just sitting there and doing nothing however you can take that amount and invest it in any number of ways maybe buy bonds or maybe you buy the smp index then you should be able to get more than four percent when you have an option of getting more okay that means choosing that
Will get you more in the end however when you invest it of course there’s always risks so think of it this way you owe the bank 160 k at 4% now if you’re so-called investing okay if you’re a really good investor would you borrow another 160 k from the bank and let’s say they give you a 4% interest rate they just let you take it out in cash would you do that and
Put it in the stock market now when you think of it that way you might get a little edgy here because you’re laying on i don’t want to borrow that much what if something happens to it yeah that’s exactly the deal here because when you take that money out it involves risks because sometimes you could lose money in even the smp here and you might end up with less
Than 160 k and then you owe the bank more money so to pay into it or not is really your confidence if you should invest it instead now let me convince you that in an smp etf one might be a good idea it usually has low fees and it buy stock in the smp index investing in an index is supposed to be relatively safe but still you don’t know what’s going to happen there
Are some risks involved but let me show you why over here i’ve written down the gains that you would get in the smp for the last ten years you can see in 2016 it’s made 25.8% so far towards this is towards the end of the year so you know it’s going to be around there somewhere maybe and in 2015 is one point four percent let’s go back in a one year at a time here
13.7% whopping thirty two point four percent in 2013 that’s crazy way more than four percent right and 16 percent 2.1 percent fifteen point one percent twenty six point five percent and in 2008 it was – 37 percent so can you imagine taking the 160k out and all of sudden it drops by 40 percent we’d probably go from 160 k all the way down to 100 k you would feel not
Very good when that happened so these things do happen and we don’t know what’s going to happen here however if you wait long enough right you’d borrow that 160k you wait one year two year and then it kind of made up for it so it take maybe two or three years before you can make the games back and likely you might get a bit scared after you invest hundred sixty k
Down you you see it keep on tumbling and it goes all the way down to a 100 k there’s a lot of psychology involved and a lot of people do sell at this low point because you’re scared so they tell you to just keep on hold holding on to it and if you do you’ll be rewarded by you know it popping back and doing just fine and the one year before that is five point five
Percent and then you might wonder how does the smp average over you know the long long run 1928 to 2014 here smp averaged about 10% every single year um when you adjust the for inflation it’s still 7% gain per year let’s say you hold it for thirty years and you have a good chance a very very good chance that you’re going to make more than the 4% even adjusting
For inflation so if you never pay off your mortgage and just hold that money if you have some extra cash you’re going to make at least 3% on average over what you have to pay the interest rate on your mortgage so that’s a theory and you can never predict what really happens maybe next year it might be a 2008 you don’t know strictly number wise you would not pay
Into the mortgage and actually invest it however like any portfolio you don’t want to go all into one thing okay because what if something bad happens so if you have way too much money you might want to pay a little bit into the mortgage or pay a little bit more let’s go back to original example and let’s say suddenly right after you start a mortgage you somehow
Get a windfall of 160 k maybe you win the lottery you win something or inheritance or something like that so you only have exactly one hundred sixty k should you take that and just plop it in there and just completely kill it kill off your mortgage and then you don’t have a mortgage which is really great by the way if you want to retire because you never want a
Huge negative cash flow when you retire because if you cancel this out then you need really really little in order to live because you don’t have to pay for your living situation certainly if you only have 160 cake just enough to cover your mortgage i recommend certainly do not pay it off because you need to have some emergency cash is good because you could use
It to buy another property if if there’s a downturn or something and also it’s good to hold on to it for any kind of emergencies for living expenses in case of unemployment or anything like that however let’s say somehow you inherited twice as much as that 320 k then i would recommend to completely pay that off because then you can pay off your home and then you
Still have a lot of cash sitting around to for your living expenses and all of a sudden any money that you make you don’t have to take some out and put it in the mortgage of course some may not agree with this because maybe some people might say hey you have to 320 k in cash why not just buy more property with it and then rent those out and then you keep all of
Them kind of on a mortgage and then they pay for themselves yes you can do that but it does not give you the peace of mind of paying off your home and fully owning it there’s something to be said about living in a place that you fully owned and the bank isn’t chasing you down for the mortgage payment because if you ever default because of you know someone people
Not renting your other places and then you don’t have enough cash to play then you get kicked out at your home so if you actually own it you feel more secure so this is kind of like a security thing like a thing that helps you sleep well at night type of thing having this sort of security is sort of priceless to some people so that’s all i have for you for today
I hope you enjoyed this analysis and this helps you know if you should pay off more of your mortgage if you have some extra cash laying around don’t forget to give me a like over here comment down below let me know what you decide to do and don’t forget to subscribe over here thanks for watching
Transcribed from video
Should You Pay More Into Mortgage | BeatTheBush By BeatTheBush
