To Pay Off Your Home Mortgage Or Not?
When looking at whether to pay off different credit or mortgage debts, it can be hard to tell which one to go with and what to pay first. Dave Ramsey has his debt snowball, Suze Orman has yet another strategy, and if you were to search on Google there would be many different gurus explaining what you should pay off and when. It can be very confusing. My argument in this post will be that you should NOT be paying off your mortgage debt in most cases, especially if you have recently purchased a property.
Why Would I Not Pay Off My Home Mortgage?
As a very basic example, imagine that you were able to take out a mortgage for $200,000 at a rate of 3.5%, and you have a credit card with the same balance and a rate of 15%. If you were to pay off the credit cards first, it would make more sense because the amount of interest you are paying, due to paying down the credit cards at the higher interest rates would outweigh paying the lower interest rate of the mortgage. However, in all reality, who really has $200,000 in consumer debt and a similar mortgage debt as well.
Mortgage versus the Stock Market
A much more likely example would be that if you were able to pay off your home mortgage at 3.5% interest or you were able to take that same money and invest it in the stock market. The stock market has historically around a 10% average return which means that if you were to take your money and invest it into the stock market we could assume your average return over time would be 10% which is a pretty good return. Next, if we were able to pay off the mortgage instead of investing that money in the market, then we would save the 3.5% a year we would pay in interest. So, in essence, our return would be around 3.5%.
Mortgage and the Stock Market
Lets assume now that we take our original cash and invest that in the market, earning around 10% annually, then we take those returns and start paying down our mortgage of 3.5%. This now means that we would have an approximate aggregated return of 6.5%.
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