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WHY YOU SHOULDN'T PAY EXTRA TOWARDS YOUR MORTGAGE
This is going to be an uncomfortable thread for a lot of people, but it needs to be said. Yes, you SHOULD NOT make extra payments towards the principal on your home.
First you need to understand OPPORTUNITY COST.
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Opportunity cost is the concept that every decision you make means that you can't make a different decision.
If I spend $100 on shoes, I can't spend that same $100 on a new watch.
If I invest $1,000 in a CD, I can't invest that same $1,000 in the stock market.
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If I spend $100 on shoes, I can't spend that same $100 on a new watch.
If I invest $1,000 in a CD, I can't invest that same $1,000 in the stock market.
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And most importantly, if I pay $100 towards the principal on my mortgage, I can't invest that same $100 into low-cost index funds like $QQQ.
That's opportunity cost, and it's not all that hard to understand.
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That's opportunity cost, and it's not all that hard to understand.
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The reason why this is so important for investing/saving, is because you always want to put your money in the place where it earns the most money.
If 2 savings accounts were offered, one paid 2% interest and another paid 6% interest, you'd take the 6% EVERY day.
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If 2 savings accounts were offered, one paid 2% interest and another paid 6% interest, you'd take the 6% EVERY day.
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Here's an example with mortgages and index funds:
4% Interest rate
30 Year mortgage
$200k loan amount
$955 monthly payment
Let's also assume an index fund like $QQQ or $SPY would return 6% on average during those 30 years (that's a low estimate).
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4% Interest rate
30 Year mortgage
$200k loan amount
$955 monthly payment
Let's also assume an index fund like $QQQ or $SPY would return 6% on average during those 30 years (that's a low estimate).
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With a $955 monthly payment, you're able to budget well and contribute an ADDITIONAL $100 towards the principal every month.
Paying an extra $100 to the principal helps you cut off:
4 Year and 11 Months
$26,855 in interest
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Paying an extra $100 to the principal helps you cut off:
4 Year and 11 Months
$26,855 in interest
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$26,855 just for contributing $100 extra each month.
Not bad, you think to yourself.
Alright, so far this sounds pretty good. You've saved $27k in interest payments and shaved almost 5 years off of your mortgage.
What's so bad about this?
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Not bad, you think to yourself.
Alright, so far this sounds pretty good. You've saved $27k in interest payments and shaved almost 5 years off of your mortgage.
What's so bad about this?
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Well, this whole time that you've been paying off your mortgage, the stock indexes have returned 6% yearly on average.
In that same scenario, if you had contributed $100/month for 30 years to index funds like $QQQ and $SPY, at the end of 30 years you'd have:
$100,452
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In that same scenario, if you had contributed $100/month for 30 years to index funds like $QQQ and $SPY, at the end of 30 years you'd have:
$100,452
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That's right - you read that correctly.
$100,452.
And that's by taking that same $100, that would've went to your principal balance on your mortgage, and allocating it to index funds like $QQQ and $SPY.
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$100,452.
And that's by taking that same $100, that would've went to your principal balance on your mortgage, and allocating it to index funds like $QQQ and $SPY.
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That's a $74k difference, just by making a better decision on where you allocate your money.
Now, a lot of people want to talk about the mental burden of having a mortgage - which is fair and justified.
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Now, a lot of people want to talk about the mental burden of having a mortgage - which is fair and justified.
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The thing is - we're talking about $74k here.
It's no small amount.
Isn't the mental burden of missing out on $74k, greater than the mental burden of having a few extra years of payments?
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It's no small amount.
Isn't the mental burden of missing out on $74k, greater than the mental burden of having a few extra years of payments?
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Thanks for reading through this thread.
If you enjoyed it, please throw a few likes and consider following me. I post finance tips like this all the time.
If you disagree, feel free to reply and let me know why!
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If you enjoyed it, please throw a few likes and consider following me. I post finance tips like this all the time.
If you disagree, feel free to reply and let me know why!
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