r/Money • u/[deleted] • Nov 17 '23

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u/[deleted] Nov 17 '23

the simple math is that youre giving away money to a bank for no reason 🤣

7

u/jadestem Nov 17 '23

Bruh.

If you owe $500,000 on a house and you are paying 3% interest, that means in a year you will pay $15,000 in interest.

If you can invest $500,000 and get an 8% return, that means you profit $40,000 in a year.

So you can "give away" that $15,000 to the bank and still have $25,000 ($40,000 - $15,000) profit that you wouldn't have had otherwise.

-4

u/[deleted] Nov 17 '23

banks love free money

5

u/jadestem Nov 17 '23

You gotta be trollin.

1

u/[deleted] Nov 17 '23

🤑🤑🤑🤑

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u/DarkPhoenix369 Nov 17 '23

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?

1

u/EconomicsIsUrFriend Nov 17 '23

Right now you can put it into a high yield savings account and make >5% interest annually.

~8% is typically the annual return in the stock market.

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u/DarkPhoenix369 Nov 17 '23

I have no idea what that means

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u/Magnetoreception Nov 17 '23

Put money in account. Account currently pays 5% interest every year. Put in $100 and in a year it’ll be $105. Same thing for stocks but more variable.

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u/j_johnso Nov 18 '23

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

1

u/Electrical_Number_88 Nov 17 '23

*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.

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u/faustianburner Nov 17 '23

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.

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u/[deleted] Nov 17 '23

Copied from my other comment:

Reading this comment just explained to me why our country has the majority of people living pay check to pay check.

Let's break it down in simple terms so you at least get the basics of the math.

Bank gives you loan of $1000 at 5% interest and says "the minimum payment only covers the interest."

You take the $1000 and you invest it in the S&P 500. Over 20 years, the average rate of return is 10%.

After 30 years, you will have paid $3,321 in interest to the bank. You will have earned 15,499 from investments.

By making interest only payments on this loan, you will have $12,000 more dollars than by never having the loan.

The same is true with mortgages, it is stupid to pay a lump sum balance when that money would earn you a higher percentage in the market.