August 18, 2024 • 28 mins
Wondering of paying off mortgage is the correct action to take. It depends on where in life a person is and reasons why to pay off mortgage.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Charles McDonald (00:03):
Hello, I'm your host, Mr. Chuck, a retired
accountant turned truck driver,I reduce my debt in a relatively
short period of time, debtreduction to achieve financial
freedom takes commitment,confidence determination.
Worried about paying offmortgage, wondering if paying
(00:24):
off mortgages to crack action totake. It depends on where in
life a person is, and thereasons to pay off the mortgage.
So that's what you have to askyourself, Where in life am I?
And what's, why should I pay offmy mortgage?
Unknown (00:43):
Let's start by saying your credit
Charles McDonald (00:47):
card debts all paid off your personal loan
debts all paid off, your carloans are paid off, you've been
working on it for two or threeyears, you're getting your debt
under control. Maybe the onlything you have left is your
first mortgage and a line ofcredit on your home. Let's work
on that line of credit first,because that rate can go up and
(01:11):
down, and most likely going up,what's going to cost you more
money. So you should focus ongetting your line of credit paid
off first. Now all the reason Iuse a line of credit was to
remodel the home, I didn't useit to buy a car, I didn't use it
to pay off debt, I didn't do anyof those things. I only use it
(01:35):
to make improvements to thehome, I paid that off. First,
before I looked at my firstmortgage suing you have all your
debt paid off, you have onemortgage, and you have a
mortgage payment, maybe it's1500 to $2,000 a month, it could
(01:57):
be more could be less, andyou're at five or 6% rate of
interest. If you have a mortgagethat's two or 3% fixed, and
you've had it for less than fiveyears, you want the don't want
to pay that one off, you want tocontinuing to set aside money to
(02:20):
pay it off later. But right now,it's relatively cheap money,
because it's such a low rate ofinterest. If it's a monthly
payment that you can make, andit's not killing your budget,
then let's keep it. So if that'sthe only place you were and
(02:41):
you're wondering if I should payoff my mortgage, that case
probably not also depends onyour age, how much money you
have saved up for retirement,and how soon you're going to
retire. My goal, my personalgoal was to be debt free, before
I retired, and I achieved thatgoal about two years before I
(03:05):
retired, that really free up alot of money that I was able to
put aside and increase myretirement savings those last
two years I work and it was latein life. So it doesn't really
help you a whole lot when you dothat. But something is better
(03:25):
than nothing is what my focuswas at that particular point. So
let's assume you're between 35and 45, you have been in your
house for eight to 15 years,you're not planning on moving
anywhere you like your job, yourcareer, you're doing well. You
(03:46):
have a low rate of interest. Youdon't expect to be laid off, or
you're not planning on havingany more children, your car's
paid off all your other debtspaid off. And you're saving up
money, you have a significantamount of money in your
(04:07):
emergency fund at least sixmonths worth of your monthly
expenses. That's six months ofmortgage payments, that includes
real estate tax homeownerinsurance, surance for the car,
living expense, gas, food,clothes, all those types of
things you may have to pay outyou have six months worth or
(04:29):
more, more than better. Andthat's in an account is somewhat
liquid. Because we're as we'regonna go on here, if you pay off
that mortgage, you have an assetthat's worth a lot of money that
you can't get to the moneyfairly easy. And if you do and
means you're gonna borrow moneyin order to do it, so you'll be
(04:52):
back in debt. So with all thosethings, let's go through if
you're thinking about paying offIf you're more gates, you're in
a fairly good position. That'sassuming you maxed out your
retirement savings. That'sthrough work. If you're self
employed, you're maxing outwhatever retirement program you
(05:15):
set up through your selfemployment, whether it's a
traditional IRA, simple IRA,whatever you might have, you're
making the maximum contributionsevery year, and that doesn't
kill your finances to do so. Andyou're also able to set more
aside and invest maybe in themarket, and you're gradually
(05:35):
increasing that every month,they may be 500 or $1,000 a
month. So you're looking likeyou're in fairly stable, good
situation. So let's, why are youworried about paying off your
mortgage, there's some pros andcons to paying off the mortgage.
(05:57):
So this what we're going to talkabout, maybe you're even
consider accelerating yourpayment plan to knock out the
mortgage faster. If you do that,make sure you just apply it to
principle don't make a extramonthly payment. So if your next
payment due is August, don't,and you got the money to pay it,
(06:20):
and you got the money to paySeptember's monthly payment,
don't pay September's monthlypayment, that's not going to
help you because they're gonnaapply it when that payment is
due not when you make thepayment, so it's not going to
help you, it's not going toreduce the interest on the loan,
you need to apply a lump sumamount of money to the
(06:42):
principal. Because if you reducethe principal, that's going to
reduce the amount of interestthat you're gonna owe them, it's
not gone to reduce your monthlypayment at all, the only way to
get a lower monthly paymentwould be to refinance the loan.
And if you're sitting on a lowinterest rate loan, you probably
(07:06):
don't want to do that. Unlessthe interest rates dropped down
to where they were you have,which may happen in the next few
years. Who knows. At that point,you could refinance the balance
shirt and shorten up the timeand have about the same payment
or a maybe even a lesserpayment. But there may be
(07:26):
reasons you might want to payoff your mortgage. But should
you let's consider whether anearly mortgage payoff is right
for you. The first one is thatpaying off your mortgage early,
let less debt increase yourmonthly cash flow mount because
you have less payments to make.
So you're gonna have more money,which you can then pump up your
(07:47):
retirement or whatever else,your emergency fund or whatever
other savings you may be doing.
If you keep the mortgage, if yourefinance in the last five years
or so he should have a lowmortgage rate. In other words,
you borrow historically cheapmoney. Let's try say if you got
(08:09):
a house say less than 4% 5% 4%,anything less than that, you
have relatively cheap money. Soyou shouldn't be too much of a
hurry to pay off your mortgage,unless you have a good reason to
(08:29):
do so. Investing and paying offyour mortgage early. By
eliminating interest payments,you gain an effect in equivalent
risk free return that 4% used topay the lender is now back 4%
And your pocket, okay, you payit off whatever your interest
rate was, you're not Outlandthat cash anymore. Use, you can
(08:55):
keep it if you keep themortgage, investing the money
rather than paying off yourmortgage may give you a higher
rate of return, especially intax advantage or tax free
accounts. So if you have an IRAor your retirement account, and
if you don't have a maxed out,or even if you have a maxed out
(09:16):
to your employer's match, youcan you may still not have a max
out all the way. The amount youryearly contributions. It's a big
number, it's like 25 35,000 ayear, which becomes tax free so
you don't pay any income tax onthat. So if you're in a higher
(09:37):
rate of income, let's say200,000 plus a year, you can
defer some of that through yourretirement plan. So that would
be an advantage instead ofpaying off your mortgage.
Now this is assuming that you'reusing your monthly income I'm,
(10:01):
and you're saving it up, andthen you're applying it to the
principal over a period of time.
So instead of saving it andapplying it to the mortgage
principal, you're putting itinto an investment account,
where you might get a six or 8%,or even more return on your
investment. Don't worry aboutthe math don't think, well, I
(10:21):
have a 5% rate on my mortgage,but I can get a percent on an
investment on the average as 3%gain to me, that doesn't always
work out like that, becausethere's no guarantee you're
gonna get the 8%, there's aguarantee is gonna cost you 5%
on the mortgage, but there's noguarantee that you're gonna
(10:45):
receive a percent, one year, youmight get 8%, you might get 6%,
you might get 3%, you might geta negative percent, he might get
a more, but there's noguarantee. So don't look at it
that way. Don't think mymortgage is X percent, I can get
this, I can net the difference.
(11:09):
Because that doesn't always workout. So don't even because
you're not considering the riskof the investment. Cash flow, if
you pay off your mortgage,because your living overhead is
lower, you'd be able to tapfewer of your retirement assets
to meet monthly expenses. So ifyou've been pulling money out
(11:31):
your retirement, the Meanmonthly expenses, you got a one
quit doing that, if you wouldpay off your mortgage, probably
you're not in the position to doso. If you are taking money out
to pay monthly expenses, yourretirement paying off your
mortgage is not in this case,your best interest, you need to
(11:56):
first stop using your retirementmoney for your monthly bills,
you need to get your personalfinances under control first, go
forward from there. So you'renever taken money out unless
you're retired, because you'repaying a penalty, and you're
losing the opportunity of thewhat the money would earn you.
(12:19):
So it's generally speaking asnot a good thing. 3545 age
range, you should be puttingmoney in your retirement and
leave it there until you retire,you're saving up your nest egg.
If you keep the mortgage, a longterm fixed rate mortgage is an
inflation hedge or the risk ofinflation assume entirely by the
(12:42):
lender. As the cost of livingraises your interest rate stays
the same. Over time, the lenderreceives payments that are less
valuable due to inflation. Okay,so again, if you got that low
rate of interest, and it's fixedrate is not going up or down,
generally up. That's where yourline of credit is gone, it could
(13:04):
hurt you. You don't want tomaybe to pay it off unless it's
a high rate of interest, likeeight or 9%. But only if all
your other debts paid off. Andyou can afford to do so without
killing your budget. And you'renot tapping into your retirement
(13:24):
money to do so. And youshouldn't be using your
emergency fund to pay off yourmortgage. Let's say your balance
on your mortgage is $30,000.
You've been paying on it for 25years, he got a six and three
quarters rate of interest. Don'tpull money out of your
retirement account to pay itoff. That is not a good way to
(13:44):
go. At skin it's opportunitylost on that investment. And you
got to keep it for yourretirement because that's what
it was intended for. And that'swhat it should stay there. So
mortgage payoff considerations.
Let's talk about taxes. If youitemize the benefits of the
(14:07):
mortgage interest deductionwould disappear after you get
rid of your home loan. So ifyou're still itemizing your
deductions on your income taxreturn, and if you don't know
it, because somebody does it foryou, pull out your tax return
find Schedule A, see how muchyou're claiming. If you have no
(14:28):
schedule A in your 1040 return,you're probably using the
standard deduction because itwas raised much higher a few
years ago, so your mortgageinterest and your real estate
taxes has to be a significantamount of money to be an
advantage for you to itemize. Sounless you're still be able to
(14:53):
itemize taxes is reducing yourtaxes. You pay the banker
reduces pan, the government, hedon't pay the banker, you pay
the government. That's just theway it is least on the federal
level, your retirement planning,we're are you and your
(15:14):
retirement planning?
Have you been investing on aregular basis since you were 20?
Since your first job, since youwere 2528 years old, and you're
building it up, and you got tolease 500,000 or more in
retirement, or you're justgetting started on your
retirement, maybe that extramoney should be able to put more
(15:38):
into your retirement, whichwould live by doing that it's a
payroll deduction. So you,you're, you have this extra
emergency fund built up, you'renot planning on being
unemployed, or losing your jobor anything like that, or
changing jobs or changingcareers. You have an extra two
(16:03):
grand a month that you just keepputting in a savings account.
And then every once in a whileyou put it in the stock market.
Why don't you increase what youput into your retirement account
by $1,000, and build up thatretirement account faster.
Because at the age if you're 35to 45, you're still young
(16:25):
enough, where if you build it upfaster starting that your
current age, it's gonna growsignificantly over time. But
time, your age now the time youretire at age 65, full
retirement age for SocialSecurity is 6667. For the year
(16:46):
younger people, maybe you'replanning on retiring a little
bit early, say at 62. You don'thave to draw out your Social
Security at 62. You can justwait until you're older until
you can get full retirementbenefits, understanding how
Social Security work, and whatyou get, what you got, and what
(17:10):
you're gonna receive from sosecurity is important. And this
long term plan, if you're closerretirement and have nothing
saved up, then you should beworking on your retirement,
maybe slow down what you'repaying off your mortgage.
Instead of paying it off in thenext two years, pay it off over
four years and put more intoretirement. Try to build that up
(17:33):
a little bit better. And what'syour interest rate, saying
goodbye to your mortgage feellike a major financial
accomplishment. But depending onyour situation as possible that
just assess vacation. No, youhave enough money tucked away to
pay off your mortgage withoutofficially conducting the
transaction. Oftentimes you hearabout good debt bad debt, a
(17:54):
mortgage typically falls intogood debt set scenario. That's
because it's generally lowinterest. When you have a rate
that's very low and you have theopportunity there are more you
don't have to be in such a rushto pay it down. Remember,
investment comes with risk.
There's no guarantees. That wasa Certified Financial Planner
saying that maybe he wants youto invest more because he can
(18:18):
make more money off. Preparingfor financial setbacks. Having a
house without a mortgage be agood thing. Having the lesser
debt burden reduces yourbreakeven for life expenses as
the impact would lay off ratheradverse financial event that
would be less painful. Such anautomobile rack and injury,
layoff, a recession, whateverreduction of income with no
(18:42):
mortgage, you're going to bemore comfortable, less worry.
And if you have the emergencyfund, you can get by a little
bit longer, without as manyconcerns that one option after
you pay off your mortgage is toapply for a line of credit or
equity line of credit, and havethat available based on your
(19:08):
income. So maybe they'll loanyou based on how much equity you
got while you have 100% equity,then that's gonna be based on
your monthly income. So youmight be able to get a line of
credit for 50,000 or 100,000.
You have it available, maybethere's a yearly amount you have
(19:30):
to pay but that gives you somecash that's liquid. If you want
to do a major home remodel,that's gonna be $75,000 He can
use that less equity line ofcredit instead of your emergency
fund or instead of yourinvestment accounts. The longer
(19:50):
you leave the investmentaccounts there, the better off
you're gonna be, the more moneyyou're gonna have. And the more
comfortable you retire. meantwon't be when you get to that
point. That's all the majorconsiderations we need to think
about. But you still are notsure on what you should do. Well
(20:13):
make a checklist is what thatyou have as it paid off. As your
line of credit almost paid off,I would recommend paying off any
line of credit first, or maybeif you have two mortgages pay
off the second mortgage First,pay off whichever mortgage has
(20:36):
the your higher rate ofinterest. If it's the first
mortgage, when you pay that off,the second mortgage is gonna
move up and be the only onethere. But if you get another
loan, it will have preference onfrom the creditor standpoint,
first consideration if somethingbad would happen, like you file
(20:56):
bankruptcy or something, I'll beback in one moment with my final
thoughts are the articles Irefer to in my episodes, have a
link in my show notes. If you'reinterested in checking out the
software that I personally useto get my dead oh control, it's
in my show notes under shopfinancial, you need to copy and
(21:18):
paste the link. And it will takeyou to the website. Any
questions you can just contactme through that particular
website. If you value thispodcast and I'd like to make a
contribution, I had acontribution link in my show
notes also, give whatever youfeel is appropriate for the
(21:39):
information I am providing. Ithank everyone for listening to
my podcast, paying off yourmortgage maybe is not for
everybody. And it depends wherein life you may be. If you're
younger, less than 50 years old,and you've been pretty good at
(22:00):
saving for retirement, you haveno debt, no car loans, no line
of credits, and you only haveone mortgage. And it's still a
tax advantage for you, meaningyou can still itemize and you
can still itemize so you'rewriting off your mortgage
(22:22):
interest and you're writing offyour real estate taxes, you're
making charitable contributions.
And maybe you have some workrelated expenses you can write
off. So it's an advantage foryou to itemize. And it saves you
a couple five grand Oh, andfederal income tax every year.
(22:42):
And you have significant savingsas far as an emergency account.
And you're not one of those thatgo out and buy whatever you
want. Whenever you feel like youdon't want to buy a new car, or
whatever the case, and you cansave your money in order to make
(23:02):
a major purchase, then maybekeeping the mortgage is a good
thing. But if you're 55 withlittle or no savings, for
retirement, little or no is lessthan 250,000. And you know that
your Social Security income isgonna be the majority of your
(23:25):
income and it's gonna be to$2,500 a month, I think the
average is like 1900 orsomething. But I'm thinking the
average should be closer to2500. And that's not enough to
pay off them pay your monthlybills, then you need to invest
more into your retirementsavings because you're gonna
(23:51):
need that money when you retireto pay your monthly bills. Is
there any way you can downsize?
Maybe you're in a big homebecause you have you had three
or four children but they're allwant to college moved out
started don't live you don'tneed a big home anymore. Maybe
(24:13):
should consider downsizing thehome, pay off the mortgage. If
you have enough equity you canuse the cash maybe to buy a
smaller home, maybe not lessexpensive but at least smaller
and square footage. And you canmake a significant downpayment
on it or your mortgage isaffordable. That is a
(24:35):
consideration you have to thinkabout staying put in a house
that you don't no longer need isprobably not a good idea. So
let's look at everything in yourlife and find out where what you
can do to make your personalfinances better.
(25:00):
so that when you do retire, it'seither your expenses are going
to be less, so you can affordit, or you have enough income,
or money available to pay thoseexpenses for 20 or 30 years,
that's a long time, takes a lotof money. And inflation is gonna
make those expenses even morereal estate taxes, keep going
(25:23):
up, homeowners insurance keepsgoing up, maintenance on the
home remodeling, whatever you'regonna do is gonna cost you more
10 years from today. So you needto plan for those types of
things. Even if you're notconsider doing them. But that
(25:46):
needs to be something that is inconsideration, should you
downsize the home, and maybe geta small mortgage that you can
afford, or maybe you want tomove to a different part of the
country, for whatever reason,whether taxes, family moved to a
different area, whatever thecase, you shouldn't wonder if
(26:09):
it's a good thing or a badthing, paying off your debt is
always a good thing, it's gonnafree up the monthly income for
you, the income coming in is, isyou gotta have more available to
pay your living expenses, thenyou have more available to
satisfy. For your emergencyfund, you have more available to
(26:30):
invest in your retirement, youhave more available help your
children down the road at alldepends on what your goals are.
Maybe you want to downsize thathome, so you can buy a second
home someplace, maybe you wantto travel more, maybe you want
(26:53):
to buy a small yacht to live on.
So you can live on it in thewintertime and be war torn, and
then be poor. It's cool in thesummertime, it all depends on
what you want to do. So the onlything you have to look at in the
making this consideration is howmuch you have in retirement. Do
(27:15):
you have enough? Or do you needmore? I would do that. First of
all the other debt paid off, dothat first. What's your interest
rate? Do I have a tax advantagestill on my federal income tax?
If not, maybe what's yourinterest rate, even with a low
interest rate with no taxadvantage, it's still a good
thing to keep that if you don'thave a tax advantage, you have a
(27:38):
long time left on your mortgagesame 25 plus years, 20 years or
more, and you have an interestrate above 5%. He should
consider at least reducing someof the principal on that
mortgage. Even if you don'tfinance today. If you pay down
(27:58):
the principal over the next twoyears, one to two years. When
you go to Finance you'll havemore equity. You can borrow less
money for a shorter period oftime at a monthly payment that's
not going to kill your budgetand you'll be debt free sooner
(28:21):
rather than later. Which isalways a good thing.
Hello, I'm your host, Mr. Chuck, a retired
accountant turned truck driver,I reduce my debt in a relatively
short period of time, debtreduction to achieve financial
freedom takes commitment,confidence determination.
Worried about paying offmortgage, wondering if paying
(00:24):
off mortgages to crack action totake. It depends on where in
life a person is, and thereasons to pay off the mortgage.
So that's what you have to askyourself, Where in life am I?
And what's, why should I pay offmy mortgage?
Unknown (00:43):
Let's start by saying your credit
Charles McDonald (00:47):
card debts all paid off your personal loan
debts all paid off, your carloans are paid off, you've been
working on it for two or threeyears, you're getting your debt
under control. Maybe the onlything you have left is your
first mortgage and a line ofcredit on your home. Let's work
on that line of credit first,because that rate can go up and
(01:11):
down, and most likely going up,what's going to cost you more
money. So you should focus ongetting your line of credit paid
off first. Now all the reason Iuse a line of credit was to
remodel the home, I didn't useit to buy a car, I didn't use it
to pay off debt, I didn't do anyof those things. I only use it
(01:35):
to make improvements to thehome, I paid that off. First,
before I looked at my firstmortgage suing you have all your
debt paid off, you have onemortgage, and you have a
mortgage payment, maybe it's1500 to $2,000 a month, it could
(01:57):
be more could be less, andyou're at five or 6% rate of
interest. If you have a mortgagethat's two or 3% fixed, and
you've had it for less than fiveyears, you want the don't want
to pay that one off, you want tocontinuing to set aside money to
(02:20):
pay it off later. But right now,it's relatively cheap money,
because it's such a low rate ofinterest. If it's a monthly
payment that you can make, andit's not killing your budget,
then let's keep it. So if that'sthe only place you were and
(02:41):
you're wondering if I should payoff my mortgage, that case
probably not also depends onyour age, how much money you
have saved up for retirement,and how soon you're going to
retire. My goal, my personalgoal was to be debt free, before
I retired, and I achieved thatgoal about two years before I
(03:05):
retired, that really free up alot of money that I was able to
put aside and increase myretirement savings those last
two years I work and it was latein life. So it doesn't really
help you a whole lot when you dothat. But something is better
(03:25):
than nothing is what my focuswas at that particular point. So
let's assume you're between 35and 45, you have been in your
house for eight to 15 years,you're not planning on moving
anywhere you like your job, yourcareer, you're doing well. You
(03:46):
have a low rate of interest. Youdon't expect to be laid off, or
you're not planning on havingany more children, your car's
paid off all your other debtspaid off. And you're saving up
money, you have a significantamount of money in your
(04:07):
emergency fund at least sixmonths worth of your monthly
expenses. That's six months ofmortgage payments, that includes
real estate tax homeownerinsurance, surance for the car,
living expense, gas, food,clothes, all those types of
things you may have to pay outyou have six months worth or
(04:29):
more, more than better. Andthat's in an account is somewhat
liquid. Because we're as we'regonna go on here, if you pay off
that mortgage, you have an assetthat's worth a lot of money that
you can't get to the moneyfairly easy. And if you do and
means you're gonna borrow moneyin order to do it, so you'll be
(04:52):
back in debt. So with all thosethings, let's go through if
you're thinking about paying offIf you're more gates, you're in
a fairly good position. That'sassuming you maxed out your
retirement savings. That'sthrough work. If you're self
employed, you're maxing outwhatever retirement program you
(05:15):
set up through your selfemployment, whether it's a
traditional IRA, simple IRA,whatever you might have, you're
making the maximum contributionsevery year, and that doesn't
kill your finances to do so. Andyou're also able to set more
aside and invest maybe in themarket, and you're gradually
(05:35):
increasing that every month,they may be 500 or $1,000 a
month. So you're looking likeyou're in fairly stable, good
situation. So let's, why are youworried about paying off your
mortgage, there's some pros andcons to paying off the mortgage.
(05:57):
So this what we're going to talkabout, maybe you're even
consider accelerating yourpayment plan to knock out the
mortgage faster. If you do that,make sure you just apply it to
principle don't make a extramonthly payment. So if your next
payment due is August, don't,and you got the money to pay it,
(06:20):
and you got the money to paySeptember's monthly payment,
don't pay September's monthlypayment, that's not going to
help you because they're gonnaapply it when that payment is
due not when you make thepayment, so it's not going to
help you, it's not going toreduce the interest on the loan,
you need to apply a lump sumamount of money to the
(06:42):
principal. Because if you reducethe principal, that's going to
reduce the amount of interestthat you're gonna owe them, it's
not gone to reduce your monthlypayment at all, the only way to
get a lower monthly paymentwould be to refinance the loan.
And if you're sitting on a lowinterest rate loan, you probably
(07:06):
don't want to do that. Unlessthe interest rates dropped down
to where they were you have,which may happen in the next few
years. Who knows. At that point,you could refinance the balance
shirt and shorten up the timeand have about the same payment
or a maybe even a lesserpayment. But there may be
(07:26):
reasons you might want to payoff your mortgage. But should
you let's consider whether anearly mortgage payoff is right
for you. The first one is thatpaying off your mortgage early,
let less debt increase yourmonthly cash flow mount because
you have less payments to make.
So you're gonna have more money,which you can then pump up your
(07:47):
retirement or whatever else,your emergency fund or whatever
other savings you may be doing.
If you keep the mortgage, if yourefinance in the last five years
or so he should have a lowmortgage rate. In other words,
you borrow historically cheapmoney. Let's try say if you got
(08:09):
a house say less than 4% 5% 4%,anything less than that, you
have relatively cheap money. Soyou shouldn't be too much of a
hurry to pay off your mortgage,unless you have a good reason to
(08:29):
do so. Investing and paying offyour mortgage early. By
eliminating interest payments,you gain an effect in equivalent
risk free return that 4% used topay the lender is now back 4%
And your pocket, okay, you payit off whatever your interest
rate was, you're not Outlandthat cash anymore. Use, you can
(08:55):
keep it if you keep themortgage, investing the money
rather than paying off yourmortgage may give you a higher
rate of return, especially intax advantage or tax free
accounts. So if you have an IRAor your retirement account, and
if you don't have a maxed out,or even if you have a maxed out
(09:16):
to your employer's match, youcan you may still not have a max
out all the way. The amount youryearly contributions. It's a big
number, it's like 25 35,000 ayear, which becomes tax free so
you don't pay any income tax onthat. So if you're in a higher
(09:37):
rate of income, let's say200,000 plus a year, you can
defer some of that through yourretirement plan. So that would
be an advantage instead ofpaying off your mortgage.
Now this is assuming that you'reusing your monthly income I'm,
(10:01):
and you're saving it up, andthen you're applying it to the
principal over a period of time.
So instead of saving it andapplying it to the mortgage
principal, you're putting itinto an investment account,
where you might get a six or 8%,or even more return on your
investment. Don't worry aboutthe math don't think, well, I
(10:21):
have a 5% rate on my mortgage,but I can get a percent on an
investment on the average as 3%gain to me, that doesn't always
work out like that, becausethere's no guarantee you're
gonna get the 8%, there's aguarantee is gonna cost you 5%
on the mortgage, but there's noguarantee that you're gonna
(10:45):
receive a percent, one year, youmight get 8%, you might get 6%,
you might get 3%, you might geta negative percent, he might get
a more, but there's noguarantee. So don't look at it
that way. Don't think mymortgage is X percent, I can get
this, I can net the difference.
(11:09):
Because that doesn't always workout. So don't even because
you're not considering the riskof the investment. Cash flow, if
you pay off your mortgage,because your living overhead is
lower, you'd be able to tapfewer of your retirement assets
to meet monthly expenses. So ifyou've been pulling money out
(11:31):
your retirement, the Meanmonthly expenses, you got a one
quit doing that, if you wouldpay off your mortgage, probably
you're not in the position to doso. If you are taking money out
to pay monthly expenses, yourretirement paying off your
mortgage is not in this case,your best interest, you need to
(11:56):
first stop using your retirementmoney for your monthly bills,
you need to get your personalfinances under control first, go
forward from there. So you'renever taken money out unless
you're retired, because you'repaying a penalty, and you're
losing the opportunity of thewhat the money would earn you.
(12:19):
So it's generally speaking asnot a good thing. 3545 age
range, you should be puttingmoney in your retirement and
leave it there until you retire,you're saving up your nest egg.
If you keep the mortgage, a longterm fixed rate mortgage is an
inflation hedge or the risk ofinflation assume entirely by the
(12:42):
lender. As the cost of livingraises your interest rate stays
the same. Over time, the lenderreceives payments that are less
valuable due to inflation. Okay,so again, if you got that low
rate of interest, and it's fixedrate is not going up or down,
generally up. That's where yourline of credit is gone, it could
(13:04):
hurt you. You don't want tomaybe to pay it off unless it's
a high rate of interest, likeeight or 9%. But only if all
your other debts paid off. Andyou can afford to do so without
killing your budget. And you'renot tapping into your retirement
(13:24):
money to do so. And youshouldn't be using your
emergency fund to pay off yourmortgage. Let's say your balance
on your mortgage is $30,000.
You've been paying on it for 25years, he got a six and three
quarters rate of interest. Don'tpull money out of your
retirement account to pay itoff. That is not a good way to
(13:44):
go. At skin it's opportunitylost on that investment. And you
got to keep it for yourretirement because that's what
it was intended for. And that'swhat it should stay there. So
mortgage payoff considerations.
Let's talk about taxes. If youitemize the benefits of the
(14:07):
mortgage interest deductionwould disappear after you get
rid of your home loan. So ifyou're still itemizing your
deductions on your income taxreturn, and if you don't know
it, because somebody does it foryou, pull out your tax return
find Schedule A, see how muchyou're claiming. If you have no
(14:28):
schedule A in your 1040 return,you're probably using the
standard deduction because itwas raised much higher a few
years ago, so your mortgageinterest and your real estate
taxes has to be a significantamount of money to be an
advantage for you to itemize. Sounless you're still be able to
(14:53):
itemize taxes is reducing yourtaxes. You pay the banker
reduces pan, the government, hedon't pay the banker, you pay
the government. That's just theway it is least on the federal
level, your retirement planning,we're are you and your
(15:14):
retirement planning?
Have you been investing on aregular basis since you were 20?
Since your first job, since youwere 2528 years old, and you're
building it up, and you got tolease 500,000 or more in
retirement, or you're justgetting started on your
retirement, maybe that extramoney should be able to put more
(15:38):
into your retirement, whichwould live by doing that it's a
payroll deduction. So you,you're, you have this extra
emergency fund built up, you'renot planning on being
unemployed, or losing your jobor anything like that, or
changing jobs or changingcareers. You have an extra two
(16:03):
grand a month that you just keepputting in a savings account.
And then every once in a whileyou put it in the stock market.
Why don't you increase what youput into your retirement account
by $1,000, and build up thatretirement account faster.
Because at the age if you're 35to 45, you're still young
(16:25):
enough, where if you build it upfaster starting that your
current age, it's gonna growsignificantly over time. But
time, your age now the time youretire at age 65, full
retirement age for SocialSecurity is 6667. For the year
(16:46):
younger people, maybe you'replanning on retiring a little
bit early, say at 62. You don'thave to draw out your Social
Security at 62. You can justwait until you're older until
you can get full retirementbenefits, understanding how
Social Security work, and whatyou get, what you got, and what
(17:10):
you're gonna receive from sosecurity is important. And this
long term plan, if you're closerretirement and have nothing
saved up, then you should beworking on your retirement,
maybe slow down what you'repaying off your mortgage.
Instead of paying it off in thenext two years, pay it off over
four years and put more intoretirement. Try to build that up
(17:33):
a little bit better. And what'syour interest rate, saying
goodbye to your mortgage feellike a major financial
accomplishment. But depending onyour situation as possible that
just assess vacation. No, youhave enough money tucked away to
pay off your mortgage withoutofficially conducting the
transaction. Oftentimes you hearabout good debt bad debt, a
(17:54):
mortgage typically falls intogood debt set scenario. That's
because it's generally lowinterest. When you have a rate
that's very low and you have theopportunity there are more you
don't have to be in such a rushto pay it down. Remember,
investment comes with risk.
There's no guarantees. That wasa Certified Financial Planner
saying that maybe he wants youto invest more because he can
(18:18):
make more money off. Preparingfor financial setbacks. Having a
house without a mortgage be agood thing. Having the lesser
debt burden reduces yourbreakeven for life expenses as
the impact would lay off ratheradverse financial event that
would be less painful. Such anautomobile rack and injury,
layoff, a recession, whateverreduction of income with no
(18:42):
mortgage, you're going to bemore comfortable, less worry.
And if you have the emergencyfund, you can get by a little
bit longer, without as manyconcerns that one option after
you pay off your mortgage is toapply for a line of credit or
equity line of credit, and havethat available based on your
(19:08):
income. So maybe they'll loanyou based on how much equity you
got while you have 100% equity,then that's gonna be based on
your monthly income. So youmight be able to get a line of
credit for 50,000 or 100,000.
You have it available, maybethere's a yearly amount you have
(19:30):
to pay but that gives you somecash that's liquid. If you want
to do a major home remodel,that's gonna be $75,000 He can
use that less equity line ofcredit instead of your emergency
fund or instead of yourinvestment accounts. The longer
(19:50):
you leave the investmentaccounts there, the better off
you're gonna be, the more moneyyou're gonna have. And the more
comfortable you retire. meantwon't be when you get to that
point. That's all the majorconsiderations we need to think
about. But you still are notsure on what you should do. Well
(20:13):
make a checklist is what thatyou have as it paid off. As your
line of credit almost paid off,I would recommend paying off any
line of credit first, or maybeif you have two mortgages pay
off the second mortgage First,pay off whichever mortgage has
(20:36):
the your higher rate ofinterest. If it's the first
mortgage, when you pay that off,the second mortgage is gonna
move up and be the only onethere. But if you get another
loan, it will have preference onfrom the creditor standpoint,
first consideration if somethingbad would happen, like you file
(20:56):
bankruptcy or something, I'll beback in one moment with my final
thoughts are the articles Irefer to in my episodes, have a
link in my show notes. If you'reinterested in checking out the
software that I personally useto get my dead oh control, it's
in my show notes under shopfinancial, you need to copy and
(21:18):
paste the link. And it will takeyou to the website. Any
questions you can just contactme through that particular
website. If you value thispodcast and I'd like to make a
contribution, I had acontribution link in my show
notes also, give whatever youfeel is appropriate for the
(21:39):
information I am providing. Ithank everyone for listening to
my podcast, paying off yourmortgage maybe is not for
everybody. And it depends wherein life you may be. If you're
younger, less than 50 years old,and you've been pretty good at
(22:00):
saving for retirement, you haveno debt, no car loans, no line
of credits, and you only haveone mortgage. And it's still a
tax advantage for you, meaningyou can still itemize and you
can still itemize so you'rewriting off your mortgage
(22:22):
interest and you're writing offyour real estate taxes, you're
making charitable contributions.
And maybe you have some workrelated expenses you can write
off. So it's an advantage foryou to itemize. And it saves you
a couple five grand Oh, andfederal income tax every year.
(22:42):
And you have significant savingsas far as an emergency account.
And you're not one of those thatgo out and buy whatever you
want. Whenever you feel like youdon't want to buy a new car, or
whatever the case, and you cansave your money in order to make
(23:02):
a major purchase, then maybekeeping the mortgage is a good
thing. But if you're 55 withlittle or no savings, for
retirement, little or no is lessthan 250,000. And you know that
your Social Security income isgonna be the majority of your
(23:25):
income and it's gonna be to$2,500 a month, I think the
average is like 1900 orsomething. But I'm thinking the
average should be closer to2500. And that's not enough to
pay off them pay your monthlybills, then you need to invest
more into your retirementsavings because you're gonna
(23:51):
need that money when you retireto pay your monthly bills. Is
there any way you can downsize?
Maybe you're in a big homebecause you have you had three
or four children but they're allwant to college moved out
started don't live you don'tneed a big home anymore. Maybe
(24:13):
should consider downsizing thehome, pay off the mortgage. If
you have enough equity you canuse the cash maybe to buy a
smaller home, maybe not lessexpensive but at least smaller
and square footage. And you canmake a significant downpayment
on it or your mortgage isaffordable. That is a
(24:35):
consideration you have to thinkabout staying put in a house
that you don't no longer need isprobably not a good idea. So
let's look at everything in yourlife and find out where what you
can do to make your personalfinances better.
(25:00):
so that when you do retire, it'seither your expenses are going
to be less, so you can affordit, or you have enough income,
or money available to pay thoseexpenses for 20 or 30 years,
that's a long time, takes a lotof money. And inflation is gonna
make those expenses even morereal estate taxes, keep going
(25:23):
up, homeowners insurance keepsgoing up, maintenance on the
home remodeling, whatever you'regonna do is gonna cost you more
10 years from today. So you needto plan for those types of
things. Even if you're notconsider doing them. But that
(25:46):
needs to be something that is inconsideration, should you
downsize the home, and maybe geta small mortgage that you can
afford, or maybe you want tomove to a different part of the
country, for whatever reason,whether taxes, family moved to a
different area, whatever thecase, you shouldn't wonder if
(26:09):
it's a good thing or a badthing, paying off your debt is
always a good thing, it's gonnafree up the monthly income for
you, the income coming in is, isyou gotta have more available to
pay your living expenses, thenyou have more available to
satisfy. For your emergencyfund, you have more available to
(26:30):
invest in your retirement, youhave more available help your
children down the road at alldepends on what your goals are.
Maybe you want to downsize thathome, so you can buy a second
home someplace, maybe you wantto travel more, maybe you want
(26:53):
to buy a small yacht to live on.
So you can live on it in thewintertime and be war torn, and
then be poor. It's cool in thesummertime, it all depends on
what you want to do. So the onlything you have to look at in the
making this consideration is howmuch you have in retirement. Do
(27:15):
you have enough? Or do you needmore? I would do that. First of
all the other debt paid off, dothat first. What's your interest
rate? Do I have a tax advantagestill on my federal income tax?
If not, maybe what's yourinterest rate, even with a low
interest rate with no taxadvantage, it's still a good
thing to keep that if you don'thave a tax advantage, you have a
(27:38):
long time left on your mortgagesame 25 plus years, 20 years or
more, and you have an interestrate above 5%. He should
consider at least reducing someof the principal on that
mortgage. Even if you don'tfinance today. If you pay down
(27:58):
the principal over the next twoyears, one to two years. When
you go to Finance you'll havemore equity. You can borrow less
money for a shorter period oftime at a monthly payment that's
not going to kill your budgetand you'll be debt free sooner
(28:21):
rather than later. Which isalways a good thing.
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