*Disclaimer* finances are personal and everyone must do what is right for their path.

This is one of the age-old debates in the FI/FIRE community. Let’s be honest this is an age-old topic in any financial community. My issue with this topic is that most people that have it don’t know the math. What I mean is the majority of times I see this topic being brought up I never see people breaking the math down. What’s worse is I see way too often people literally getting the math wrong on this discussion. So based on that I decided it was about time I tackle this topic head-on (you see what I did there lol).

## Scenario One $1,000 Extra Payment

**$250K House****30-year Mortgage****3% APR****$1,000 Monthly Extra Payment**

Here is our first scenario which could be a very normal and relatable situation depending on your area. Let’s just say you can’t buy a house that cheap here in San Diego. But don’t worry I will provide more examples. You want to become financially free and so you start paying down the house faster. Because “you need less money in investments with no mortgage” sounds pretty sweet deal to me. Now let us see how this played out.

**$81,000 In Saved Interest****Paid The House Off In 12 Years**

$81,000 saved is a nice chunk of change and taking a 30-year mortgage to a 12 year is incredible. Yet let’s see what investing that $1,000 a month for 12 years look like in a simple low-cost index fund like VTSAX.

**$1,000 Monthly Investment****7% Average Return****VTSAX Index Fund**

Pretty simple and easy enough for people to replicate. Let’s see the numbers.

**$241,000 In Total Your Investment Would Grow**

So by investing vs paying down the house in this scenario you would have about **+$133,000**. The math shows in scenario one investing would make you wealthier hands down.

## Scenario Two $2,000 Extra Payment

**$750K House****30-year Mortgage****4% APR****$2,000 Monthly Extra Payment**

Here is our second scenario which could be a very normal and relatable situation depending on your area. This one is for us in San Diego.

**$292,000 In Saved Interest****Paid The House Off In 14 Years**

$292,000 saved is a nice chunk of change and taking a 30-year mortgage to a 14 year is incredible. Yet let’s see what investing that $2,000 a month for 14 years look like in a simple low-cost index fund like VTSAX.

**$2,000 Monthly Investment****7% Average Return****VTSAX Index Fund**

Pretty simple and easy enough for people to replicate. Let’s see the numbers.

**$541,000 In Total Your Investment Would Grow**

So by investing vs paying down the house in this scenario you would have about **+$249,000**. The math shows in scenario two investing would make you wealthier hands down.

## Recap

Let’s do a quick recap so to speak. So far we have had two different scenarios and both times the MATH has shown us that paying down the house would actually hurt us financially. By investing the extra money we in fact would become not only wealthier but could pay off the house in full and have extra money leftover. Yet again I’m not really sure why people in the PF community seem to struggle with understanding this simple math. Maybe I need to go over a few more examples and see what happens.

## Scenario Three Pay Cash

**$150K House****No Mortgage****No APR****No Monthly Extra Payment**

Here is our third scenario which could not be very normal or relatable to pay cash for $150,000 house but cash is king they say. Now this one gets tricky because how do I run the numbers on it invested in the market? Well for argument sake I will run it on a 15-year mortgage which we all can agree is short and a 5% apr which we can all agree is high let’s see where the numbers take us.

**$62,000 In Saved Interest****Paid The House Off In 1 Day**

$62,000 saved is a nice chunk of change and now you have a $150,000 house paid for so no mortgage. Yet let’s see what investing that $150,000 for 15 years looks like in a simple low-cost index fund like VTSAX.

**$150,000 Lump Sum Investment****7% Average Return****VTSAX Index Fund**

**$413,000 In Total Your Investment Would Grow**

So by investing vs paying cash for the house in this scenario you would have about **+$201,000**. This is after you used some of the growth to also pay off the house. So we can see even paying cash for a house has a real negative effect on our wealth.

## Scenario Four $4,000 Extra Payment

**$1,000,000 House****30-year Mortgage****3% APR****$4,000 Monthly Extra Payment**

Here is our fourth scenario which could be very normal or relatable in big cities. Let’s see where the math takes us.

**$324,000 In Saved Interest****Paid The House Off In 12 Years**

$324,000 saved is a nice chunk of change and taking a 30-year mortgage to a 12 year is incredible. Yet let’s see what investing that $4,000 a month for 12 years look like in a simple low-cost index fund like VTSAX.

**$4,000 Monthly Investment****7% Average Return****VTSAX Index Fund**

Pretty simple and easy enough for people to replicate. Let’s see the numbers.

**$858,000 In Total Your Investment Would Grow**

So by investing vs paying down the house in this scenario you would have about **+$534,000**. The math shows in scenario four investing would make you wealthier hands down.

## Now What

So a few things I would like to also be mentioned in this post. The first is that all of these ROI’s for investing is based on a 7% return. Well the S&P 500 Index fund has had an average of 9.8% return over the last 90 years. I should not have to even mention this but earlier today when I discussed this on social media someone mentioned…

*“But isn’t 7% ROI a big assumption?”*

My thoughts where…

Once I replied and mentioned the average 9.8% ROI someone else responded with…

*“yes, but it doesn’t mean it will do that during the years in question. With that said- I love this. Thank you!”*

While I did thank this person as I see where they are coming from on this point. It still had me scratching my head. So I did what any good nerd does and broke out the stats. The S&P 500 historical returns over a 12 year period.

- Average 6.7%
- Minimum -3.5%
- Maximum 17.1%

Remember this is all over 90 years of that fund. So it made me curious about a few more historical periods.

#### 20 Years

- Average of 6.6%
- Minimum -0.2%
- Maximum 13.6%

#### 30 Years

- Average of 6.6%
- Minimum 1.8%
- Maximum 11.1%

I think I found another topic that I will dive into the future is exactly on returns just like this!

But back on track so hopefully with this write up we can see the simple math of how most times paying down a house or even paying cash for a house has a negative impact on your wealth. And how by investing the extra payment you literally would become wealthier in the end.

### But Is There A Secenero Where Paying Down the House Makes Sense?

Yes in fact there is! The first one is probably a very rare event which is if the APR on the Mortgage is higher than the return you could achieve in the market. I know I know but we don’t know what the return of the market will be! So it’s just too risky and etc. For this again I gave the stats on the returns over a few periods in the market.

**The second one and to me this is the Golden Rule**.

If paying off the house makes you sleep better at night. If you understand the math and prefer paying down the house at a guaranteed 4%, 3%, 2% return, or whatever APR you got. I have no issues and I would never argue with the person that said they just rather pay off the house because it makes them feel better.

The issue I run into is people at least 90% of the time don’t seem to understand the simple math and is why I decided to do this post and break it down so many times. When I mention people I don’t just mean regular old Karen in Starbucks or Joe at the gas station. I see it even in the PF community. Oh by the way PF is short for Personal Finance. There are people in the PF world who literally don’t understand the simple math yet are trying to teach other people about finances and what are the best choices for them to build wealth.

Ughh don’t worry everyone this will be another topic I will dive into is just how can someone teach you about finances that know so little about them. I have had to correct a few FI/FIRE bloggers on simple things like what a Roth IRA is.

## Enough?

Well, I think that about wraps up my thoughts and a good discussion on this topic. Let’s hope for now on I can simply just share this post instead of breaking the math down each and every time. But then again maybe I’ll get in trouble for “Marketing” my blog by sharing this post to a relevant post. Again another topic I will dive into as I am seeing an increasing amount of censoring in the FI/FIRE community with no real reason to do so. Another cool post of mine about houses is Pandoras Box AKA Your House. That was a fun post talking about how your house might seem like a great investment until it turns into your prison.

What camp are you in? The camp that pays the mortgage off early. Or the camp invests the extra cash flow.

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