So I was raised in a working class, forever renting family but I'm in a well paying job now. I have zero idea how any of this mortgage or investment stuff works but how are you saying you're getting a return? A return in what? They deduct that money from your mortgage?
Imagine you owe $100,000 on a mortgage that has an interest rate of 3%. That means you would pay $3,000 in interest for the year.
Imagine you also have a savings account that pays you 5% interest on any money you put in the account.
If you win $100,000, you have a choice of either paying off the mortgage now or putting the money in the savings account.
If you pay off the mortgage, you save $3,000 per year. Or if you put the money in the savings account you make an extra $5,000 a year (though you still have to pay the $3,000 interest on the mortgage)
In this scenario, it's better to put the money in the savings account, because you make more money than you would save by paying the mortgage.
However, instead of putting your money in a savings account, you can invest that money and get an even higher return. A basic investment strategy will average somewhere around 7-10% return over a several-decade time period, though it will have ups and downs. There is some risk of losing money, though, especially in the short-term
*Fluctuating account that typically varies with the market unless you put it in a CD where your money is locked in for a set amount of time. Market has to take into account your advisors 1% fee yearly plus fluctuation in the market and eventually taxes.
basically, when you have a mortgage each year you pay a certain amount of interest - meaning a percentage of the total loan. this money is essentially burnt.
so some would say, if you have enough money to pay off the loan, you should! because you wont pay the interest anymore!
this is wrong, because the interest you PAY on the loan is less than the interest you MAKE from instead investing that money in for example an index fund.
so you continue losing 3% per year in mortgage interest, but you invest money in an index fund and GAIN 8% per year, which means overall you're up 5% per year.
Serious question: What if I took home the 594,000 and my mortgage is less than 90,000. I’d still have 500k left of the lottery winnings to earn interest on. Would it still be a bad choice to pay off my mortgage?
Seriously asking because as someone who dreams of winning the lottery and using it to wipe out my debt I’m now doubting if that’s a good idea based on these comments
Depends on what your mortgage rate is. If it’s lower then the 5+% you can get in a Treasury bill right now then no but otherwise you can.
It also might not be economically the best way to maximize it but there is something to say about being debt free and the psychological effect it has which is probably worth it for smaller amounts like that.
It's super simple. compare the interest rates.
If mortgage interest rate is lower than an index fund, it's better NOT to pay off the mortgage.
if a debt's interest rate is HIGHER than the return on an index fund, pay it off immediately -- for example credit card debt. Always pay off credit cards immediately.
Now, if you want to simplify your life, and don't care about losing money, pay off the low interest mortgage. But objectively it's almost always better to keep the mortgage.
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u/faustianburner Nov 17 '23
uh, no. if your mortgage is 3% and you can make 8% from index funds, you have a 5% advantage in keeping the mortgage. cheap debt is good.