Why I Won't Pay Off My Mortgage Early - $1,000,000 Mistake-

If you're following that kind of advice, to pay it off faster and save interest, but you also believe you could get 12% out there somewhere, okay? Well, all you would have lost or gave up was a million dollars. And you're sitting there believing, I pay it off faster, save interest, which are true, but you are not measuring the difference of cash flow. And that's a million dollar hypothetical mistake. Does it really make sense to pay extra on your house? Hey, everyone. My name is Caleb Williams, the founder of Better Wealth. I'm here with a good friend of mine, David Anderson. And what I love about you is you make complicated things very, very simple. And you can pretty much create a calculator on any scenario. One of the big, big, big, big, big conversation pieces out there is around, should I pay off my mortgage fast? There's whole companies out there that are designed to help people pay off their mortgage quickly, all the interest that they're saving. And I even had a conversation with a good friend the other day who had a car loan, had a mortgage at like 3%, their car loan is 8%. And he made the statement, he said, Caleb, I could pay my car off with cash, but he's like, it would be better if I put that towards my mortgage because of all the interest I was saving. And I almost, I was like, I melted in my seat. I couldn't, I didn't have this calculator in front of them, but I was like, oh, like, but that just tells you how much people are seeing information and it's hard to get their mind around it. And so without further ado, I wanted to bring you up, bring one of my favorite calculators that you've built up. And I think within a few minutes, people will be able to get this, get to see the power of what you call mortgage choice. And so with that, I'll turn it over to you. Well, thanks, Caleb. And I think when people are watching this, the thing they need to take away is when it comes to money decisions, you're going to do things with emotion and logic, right? We buy with emotion, we justify with logic. But it's good to know the basic math. And here's the problem with a lot of things. People tell you part of the story. And I'm going to demonstrate this with this little scenario that we're going to do, because this just take a couple minutes. But the whole idea is don't overthink this, but start to question your money decisions. Are you really getting all the information that's best for you? And look, disclaimer, I'm not in the mortgage business. I don't sell mortgages. I'm not giving mortgage advice or anything of the nature. This is math. And we're going to do math scenarios. And you decide what kind of scenario you like. That's the whole idea of doing calculators and scenario math. So here's a typical story when people go purchase something. It could be any kind of loan, by the way. We're just thinking of a house because that's one of our biggest purchases. So this story is like, I could go buy this house for $300,000. It could be any number, doesn't matter. The story is going to stay the same. And then you'll see mortgage one, mortgage two, $300,000, $300,000. Well, what I have in here is I'm going to do cash, a 15-year mortgage versus a 30-year mortgage. For the longest time, people hear this. This is what I call partial information. And it's true. So it's not a lie. Nobody's manipulating you. If you do a 15-year mortgage, you will pay your mortgage off faster in 30 years. Well, that's profound, isn't it? 15 years, 30 years. I mean, I don't know. That's brilliant. See, that's how smart I am. Even the people in the South where you're from get that, right? Check the box. Even us redneck hillbillies, we get it. So you other people ought to get it pretty easy. So that makes sense. So we all get that. And then the other story is you save a bunch of interest. Yes, you do. Now, look, I'm manipulating this. And I'm going to tell you I am because typically with a 15-year mortgage, you get a little better interest rate than a 30. The reason I'm showing the rates the same is to show you something about cash flow. Cash flow is king on all money decisions. So I have 5% on the 15-year mortgage, 180 months. I got 5% on the 30-year mortgage, OK? And I have 5% in an earnings rate, like if I could earn interest on money. So I got the interest rates, dead interest, earnings interest the same. Tells us something about cash flow. So here's the story. I'm looking at a time period. The time period I'm going to look at is 30 years. So let's say you're a 30-year-old. We're going to go out to age 60. Well, here's how the math works. So do you save interest? Yeah, 280,000 of interest on the 30, 127 on the 15. So do you pay it off faster? Yes. Do you save interest? Yes. Do you save any money? Well, now that's where the question lingers. And people say it depends. But they never tell you what it depends on. So now you don't know how to make a decision. So let me tell you the punchline and tell you how we get to it. The cost difference with these hypotheticals between these two decisions, over that period of time, they're the same. And people are like, Dave, what do you mean they're the same? All right, here's, now let's back into it. This person pays the $2,300 a month, $2,372 for those that want the technical stuff, about $2,300, $2,400. It's going to pay the mortgage off in 180 months. We're going to assume that he's disciplined enough to take that cash flow and invest it at 5% for the next 15 years. And then he's going to build up $634,000. Now, I don't know if it's taxable, non-taxable, or any of that. We're not doing that. That's just the gross future value simple cash flow. All right, scenario two, this is where it goes wrong. $300,000 30-year mortgage is $1,610 for the payment. So I have less of a payment. Okay, well, I can't measure $2,400 to $1,600. That's not a fair measurement to start with. If I'm going to obligate $2,400 to scenario A, to be fair, I need to obligate $2,400 to scenario B. Okay, so the difference is $762. This guy pays his mortgage for 30 years and pays it off and paid all that interest. But he took the cash flow difference and invested at 5% compounded for 30 years. Both mortgages are paid off and both of them have $634,000. That's why this says the difference is zero. And that's shocking to people because they're not paying attention to cash flow math. Now, let's hit the stuff that people are going, well, that ain't fair. Okay, let's say you get a half a point difference on the 30-year. You get less. That's a less interest rate. Doesn't matter. All right, now I'm showing that the 15-year. And I even put a sign up here so you can know who the winner is, right? So we're not hiding nothing. So the 15-year mortgage mathematically plays out better. But let's measure this for 15 years now. Now, this is both houses being paid off. The 30-year guy saved the difference, used the difference to pay off the remaining debt. Okay, does the 15-year mortgage win? Mathematically, it does. So there's $20,000, all things being equal, that he would win. So I'm not saying one's better than the other. I'm not telling anybody here to pay cash or do a 15 or a 30. I'm not telling you to do anything. Different economic environments, different belief system changes the choice you make. What you ought to do is run the math to your beliefs and make sure you're making the best decision, the comfortable decision for you. That's all we're saying. And you have to have tools to do that. All right. See, now, but here's a scenario. If somebody says, yeah, Dave, yeah, it's red now. But what if you just went to this number and say, potentially over 15 years, long-term savings and investing, might I earn more than 5%? I might. I might not, right? Who knows? But let's say I did. Let's say I earned 8%. Well, in that scenario, you see how every number changes? Now, in that scenario, both houses are paid off in 15 years. But the guy who did the 15-year mortgage and saved money at 8%, he's $33,000 ahead of the other guy. Yeah. Okay. So, look, if you earned less on your money, you only earned two. Well, by all means, the 15-year, if that's what you believed in with the math, that would be a better decision for you. Yeah. Okay. So the key here is just measure your scenario. Yeah. If you go back to 5% net earnings, right? So after 15 years, mortgage one, you're quote-unquote debt-free and you have zero cash set aside. Is that correct? Yeah, you just paid your mortgage. You took that cash flow and paid your mortgage for 15 years, you're paid off. And scenario number two, that's assuming 5%, assuming that you can get a half a point, you have a, what is your balance at year 15? The balance difference is this much less. So what it says is I have to pay off the remaining mortgage. Right. Yeah. And if I save that money paying off my mortgage, I'm short $20,000. Okay. That's what that number is. It says I don't have as much as you. You have $182,000 saved up, correct? Like that would be your side account? That's the future value of the payment stream. But you got to remember, I have this debt. There's a lot more to the calculator that you don't see. Okay. So it's going to show you how much remaining debt there is and all. I just didn't want to get too technical. Which what is the remaining debt? 200,000. That's okay. So, but this is the point that I want to make. And again, it all depends on a different scenario. Even at this interest rate, I personally would rather have a side account where I had $180,000 where that's a lot of payments that I could make. But I also know that 5%, I'm cool with 5%, but depending on who I am, there will be an opportunity for me to say yes in the next 30 years, not investment advice. In the next 30 years, there will be an opportunity for me to say yes to something. And it's the person that's able to say yes that has capital behind it that might be able to make a greater difference than 5%. So my whole point is even at 2%, even if you change the net earnings rate to 2%, it's not that I'm ignorant about the math. It's the, I value control and I would rather have $143,000 with a fixed 30-year mortgage rate than maybe mathematically being a little bit better off. And then obviously that totally shifts if you use Dave Ramsey's numbers at 12% or 8% kind of deal. It's one of the things that just interesting to me is I like to share both sides because yeah, we're sometimes, we don't want to be too analytical. We also want to put a little bit of the, let's put scenarios to it. And if you're at all entrepreneurial, if you're at all like see opportunities and investments, having access to capital could be way more valuable than 5%. Well, exactly. And this is why, Caleb, the personalities that are out there that are telling people what to do really frustrates me because they're giving general advice, which can be harmful to some people. So if this scenario we're playing out, if there's a person that doesn't look for opportunities, they just like to go to work. They like to go home. They live a simple life, which is great. I love that. And they're just a CD investor and they're just going to be on fixed accounts. Then they ought to pay their debt off faster if it's at a higher rate. So that would make sense for that. If a person likes opportunity, that's why I say each person's different. And I don't like rules of thumbs or canned answers. Right. So watch. This is a great way to show this about should you pay extra and all this stuff. So if I look at a 30-year time frame, 360 months, and I'm going to make both of these 30-year mortgages side by side. Yeah. At the same interest rate. All right. So you notice the red column and the green column, mortgage one and two are the same. Yeah. And of course, the balance is zero. The interest, everything's the same. And that makes sense. OK, great. Now, this person says, man, I want to pay extra on my mortgage to pay it off faster so I can save interest. They pay 500 extra a month. Did they pay it off faster? Yes. They went from 360 months to 215 months. Did they save interest? Yeah. About 120 grand. Did they save any money? No. Not if they earn 5% on the cash flow difference. It's identical again. Now, if you go to the Ramsey School and believe you can get 12%, that's not a Dave Anderson statement. That's a Dave Ramsey statement. Not me, right? Different Dave. Different Dave, right? There's the correct one and there's the other one. You got more hair. He's got more money. How's that? Well, barely. I mean, I'm catching up with Ramsey with my hairdo. So here's the thing, though. It's like, I'm not arguing Ramsey or anybody else. I will model what anybody believes in. It's their data, their model, their beliefs. I'm going to model what I believe for me and I'm going to make my decisions my way. But here's the deal. If you're following that kind of advice to pay it off faster and save interest, but you also believe you could get 12% out there somewhere, well, all you would have lost or gave up was a million dollars. And you're sitting there believing I pay it off faster and save interest, which are true, but you are not measuring the difference of cash flow. And that's a million dollar hypothetical mistake. Even if you use a reasonable long-term gain of 7% or 8%, 6%, whatever. The key is, if my earnings rate is a little better than my debt rate, that's a positive leverage in your favor. It's what the banks have done to us our whole life. And we just need to learn how to do it back or do it inside of our own financial lives a little bit where it's kind of safe and secure. That's a fixed rate mortgage. Think about this, when the mortgage rates were down at 3% or 4%, we can usually earn more than 3% or 4% over a period of time comfortably. But even at this scenario, paying extra on this mortgage didn't save you money hypothetically if cash flow was equal and everything was true. That's almost a quarter million dollars lost on the same cash flow. What you need to do is work with people with tools to where they can run your scenario for you to make your decision. I'm not telling anybody which one to do. I don't tell them what to do in my office. I'll run the math and say, this is how that works. Dave, I want to do it this way. Sounds great. So there's a lot. We could do scenarios with this loan comparison calculator all day and tell all kinds of stories. What I want people to get is you need to be measuring money decisions. And the key here is cash flow needs to be equal going into the scenario. The scenario does some work and they produce a result. But make the feed on the front end equal or you're not doing a fair measurement in the lab. Yeah. And going back to obviously winner number two and just at an 8% assumption rate. But even if, just think about it. Mortgage number one, they're not only $230,000 behind over 30 years for this scenario. But also, let's just run a scenario. 20 years in, something happens. And you've been paying off your mortgage fast and you got nothing to show for it. And, or I don't know, maybe 10 years in, 15 years in. So from a risk management standpoint, I get a little bit even anxious and nervous. And the calculator in this scenario is not showing from a risk management standpoint, what's the least risky. But on the flip side, we're giving people the benefit of the doubt that they're going to save the difference. And in a lot of cases, people don't. So to give Dave Ramsey credit, he's like, hey, I'm talking to the person that's not going to invest a difference. Like a 15-year mortgage is going to put stress on you. And that's a good thing because you're never going to get debt free. So I think it's like, it's one of those things, if you're disciplined enough to watch these videos and you understand, it's like, yeah, understand these tools. But understand that math is black and white, but your life is not. And so, which I like that quote, by the way, math is black and white, but your life is not. And I think there comes down to that's why planning is important. And that's why looking at this stuff every year and looking at your scenarios is really key. By the way, Dave, can you add the mortgage interest tax deduction on this calculator? Yeah. If they get one, because you could do a down payment and you can reduce the starting amount. And then, and we can do some tax scenarios in here. Yeah. I'm even talking about like being able to write off the interest, you know, to like the 5%, that's a deduction. And if people are able to deduct that, you know, and what it would do is it would just, it would squeak out and maybe create an efficiency a little bit more to the mortgage too. But it's, you know, it's just interesting scenarios to run. Is there anything else that you want to share or mention the takeaways as it relates to like this scenario? No, I think the point you made has to be reiterated with any kind of tool or measurement. And we have to be very careful. I'm very careful in my office when we do strategy work a little bit, is don't try to help a person that's very, very undisciplined do a disciplined strategy. You'll hurt them more than you'll help them. And so if, look, typically people that have a big debt problem are undisciplined people. And so you need to get a disciplined control of money strategy and get that thing in order. And that's been a lot of what, you know, people like Dave Ramsey and others have done is about getting in control of money. And I'm certainly a fan of getting in control of money. I mean, I'll argue with a lot of people on what's the most efficient scenario, but that also matters what kind of person it is. And this is why I don't like blanket canned advice, because I can show the math is one way, but I wouldn't tell one person about it where I would tell a disciplined person about it because it's, I want the person to win. The math is just another data point. I love it. Hey, if you're, if you're working with clients and you, and you're watching this video and you're like, Hey, I want to have, I want to learn directly from Dave. I want to be able to use the lifetime income process. And I want to just be a part of this community of people that have access to lots of different resources. We have a link down below for you. And like always, if you're someone watching this and you're like, I want to just learn more and see, have you guys helped me with my money? There'll also be a link down for you as well. And we, we exist because we want to unlock intentional living. We don't believe you are wealthy if you're not living intentionally. And what I love so much about what you've inspired me and you've taught me, Dave is if you can do proper planning, you can help people get their money figured out. They can think more and be able to have actions to do the things that they truly want to do, because not everyone is as messed up in the head like you and me and want to talk about this on our spare time. Most people just want to make sure that they're doing the right thing so that they can show up powerfully in other areas of their life. And so thank you for making calculators like this and really, really thinking through different scenarios. It's made me a better person and hopefully people at home watching and listening to this can share the same. And the last thing I'll say is, if you have questions, thoughts, feedback, we want to hear from you. We're in this series. I can drill Dave on any type of questions or scenarios. And he either has a calculator or make a calculator. And so if you have questions, we want to hear from you. And we're hoping to really get this off this ground and in this series off the ground. So please feel free to share this. 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