June 18, 2024 • 25 mins
In the intriguing episode of the Teaching Tax Flow podcast, John and Chris delve headfirst into an important financial debate: "Should you use your savings to pay down or pay off your mortgage?". This episode navigates through various financial strategies, tax considerations, and personal factors that can influence this decision, aiming to provide clarity to listeners who find themselves pondering this financial dilemma.
The discussion kicks off with an analysis of current interest rate trends and their impact on mortgage payments. Chris outlines four primary financial considerations when deciding whether to pay off a mortgage: comparing interest rates, opportunity cost, liquidity, and the psychological comfort of being debt-free. Tax implications come next, focusing on the mortgage interest deduction and its influence on net effective mortgage rates. The duo also explores the pitfalls of neglecting these considerations, such as unexpected tax liabilities and future lending limitations. Chris emphasizes the necessity of maintaining a liquid cash reserve and consulting with financial professionals before making such decisions.
Key Takeaways:
- Interest Rate Comparison: Evaluate the interest rate on your mortgage versus the rate of return on your savings or investments.
- Opportunity Cost: Consider what other financial opportunities you may forgo by using savings to pay off the mortgage.
- Liquidity Concerns: Maintain sufficient liquid reserves to cover at least three to six months of living expenses.
- Tax Considerations: Understand the effects of mortgage interest deductions and potential tax implications from capital gains or pre-tax withdrawals.
- Psychological Factors: The peace of mind from being debt-free can be a significant factor for many individuals.
Notable Quotes:
- "No decision is a decision." - Chris Picciurro
- "If I've got a mortgage with a balance of $200,000 and $250,000 sitting in my bank account, should I use that cash to pay off the mortgage?" - Chris Picciurro
- "It's not just about the numbers; it's also about how being debt-free makes you feel." - Chris Picciurro
- "You must consult a financial advisor before making a comprehensive decision like this." - Chris Picciurro
- "Tax flow and cash flow are not the same things; always consider the after-tax implications of your decisions." - Chris Picciurro
Episode Sponsor:
Strategic Associates, LLC
Roger Roundy
www.linkedin.com/in/roger-roundy-86887b23
- (00:04) - Should You Use Savings to Pay Down Your Mortgage
- (02:43) - Podcast Origins, Travel Stories, and Financial Strategies
- (04:43) - Financial and Tax Considerations of Paying Off Your Mortgage
- (09:17) - No Decision Is Still a Decision in Everyday Choices
- (10:10) - Financial Considerations for Paying Off a Mortgage
- (15:26) - Tax Implications of Using Savings to Pay Off Mortgages
- (18:25) - Factors to Consider Before Paying Off Your Mortgage
- (22:38) - Teaching Tax Law and Building Your Board of Directors
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Intro (00:04):
Welcome to the Teaching Tax Flow podcast, where the goal
is to empower and educate you tolegally and ethically minimize
taxes paid over your lifetime.
John Tripolsky (00:17):
Hey, everybody, and welcome back to the podcast
episode 88 today. We are gonnadive head first into should I
use my savings to pay off ormaybe pay down my mortgage or
your mortgage unless you'refeeling really, really generous
and you could pay mine? But inthat case, let's stop wasting
time and let's jump into itafter we hear from our episode
(00:39):
sponsor.
Ad Read (00:41):
This podcast is brought to you by Strategic Associates.
Are you a high income earner,real estate investor, or
successful entrepreneur who isfrustrated by having to pay
$75,000 or more of annual taxliability? If so, Strategic
Associates can help. Your firststep to saving 1,000, if not 100
of 1,000 is to contact RogerRoundy at roger@strategicag.net
(01:05):
or by calling 801-641-2956, andbe sure to tell them TTF sent
you.
John Tripolsky (01:13):
Alrighty, everybody. You heard the intro,
and the offer still stands. Ifyou're feeling really generous,
we have plenty of mortgages thatI'm sure you could pay off if
you really feel like it. Butlet's assume you're considering
paying off or paying down yourown mortgage with your savings,
your hard earned savings. We aregonna answer that question for
you.
So think of it as almost theShakespeare quote, right, of was
(01:36):
it to be or not to be? That isthe question. Well, the question
today is how do you use yoursavings? Obviously, for your
mortgage. So the best guy wecould bring to the table is the
bald, brawny, and beautiful,mister Pecuro.
How's it going, man?
Chris Picciurro (01:52):
Oh, I am great, John. How are you doing?
John Tripolsky (01:55):
Hey. Pretty good, man. Pretty good. This
one, I'm excited about this oneas always. I know I say that a
ton.
It's kind of me on repeat asalways. But this is a really
good topic because, right, somepeople think that, you know, we
won't say all debt is bad debt,but they look at a mortgage as
being a huge, you know,liability. It's a monthly bill
(02:16):
that they really don't wannapay. But ironically enough
though, right, somebody mighthave a we'll call it a $800
mortgage, but then they go andbuy a car that they're paying
more than $800 for, and they'recomfortable with that. So I look
forward to this one diving intoit.
You know, the the financialbenefits, tax benefits. I know
we're gonna digest this anddissect this a little bit. But,
(02:38):
honestly, I don't even know thebest place to start with it with
this topic. So I'm gonna kindathrow it over to you for that
one.
Chris Picciurro (02:43):
Well, it's a great topic, and apologize for
my voice being shot. Hadattended 5 days straight worth
of travel baseball world seriesplay for our youngest. So, but
feeling good, John. I was backdown in Panama City Beach,
Florida, the birthplace of thisyear podcast. Some memories
(03:04):
spewed out.
That's right. Every time
John Tripolsky (03:06):
I eat pizza, you know, I I think about it. You
know what's funny too? Thinkingof that podcast. It's almost
like the smell of pizza remindsme of our first podcast.
Probably because we wereliterally nose to Mike, all
huddled up on a couch on thelittle cheesy little $10
lavalier mic that hooked up toan iPhone and a pizza box.
But Well, it's good being
Chris Picciurro (03:26):
that we had mouthwash and toothpaste on that
trip.
John Tripolsky (03:29):
And and we're lucky that we like each other.
We could, you know, cuddle up onthe couch.
Chris Picciurro (03:33):
So Exactly. Exactly. Well, let's I don't
know. I can't even I can't evensegue cuddling into this into
this. So let's cuddle ourfinances here, but this is a
great topic.
I I kinda feel silly that ittook us almost 2 years into this
podcast, episode 88, to addressit, and I can't even take credit
(03:53):
for the topic. Someone in ourdefeating taxes private Facebook
group proposed this topic andand threw it out there for us.
And I thought, man, that's agreat, great topic. We had a
little bit of content on it thatpeople enjoyed. So, yeah, we're
in an interesting environment.
Interest rates have climbedquite a bit over the last couple
(04:13):
years. And there's people that,that have, through various
resources of work and whatever,have have stockpiled some some
assets, some cash. When we saycash, we're not talking about
necessarily physical dollarbills cash, although it could
be. We're talking about moneythat's real liquid. Okay?
So things liquid means you canaccess it quickly. So this would
(04:35):
be money in your checkingaccount, your money market
account, your savings account atyour typical credit union or
bank or brokerage account. So,you know, we we had this
question posed that, hey. IfI've got a mortgage let's say,
John, let's just say you have amortgage with a balance of
$200,000 and you've you've got$250,000 sitting in your bank
(04:56):
account, and you could basicallytake 200 of that 200 of that
200,000 of that and wipe outyour mortgage should you do it.
And when really it comes down toit is we've got different
factors.
Right? There are financialconsiderations, and then there
are tax considerations. And thenthere are x factors, I wanna
(05:17):
call them, because we like xfactors. We all we use that x
factor when we talk about how topick a tax professional. But,
but yeah.
So we've got financialconsiderations and tax
considerations. Let's talk firston the financial considerations
because the first thing you haveto figure is this. It's it's
real simple. Take the taxbenefit tax part out of it. What
(05:38):
rate of return are you gettingon that savings versus what is
your mortgage interest rate?
So luckily, many people listento the show and know that my
wife and I relocated fromMichigan to Franklin, Tennessee
about 8 years ago. A coupleyears after we relocated, we
refinanced our home. Luckily,interest rates were at 3% at
that point. So our interest rateis super low on our on our
(06:01):
property and our main residenceand our primary residence, I
should say. So So if I'm gettingpaid 5%, 6% from the bank,
credit union, etcetera, does itmake sense to take money out of
that that account that I'mearning 5, 6% to pay down or pay
off a mortgage that I'm onlypaying 3% interest on?
(06:23):
So you've got to really thinkabout the on the first first
financial consideration is thinkabout the interest rate. Right?
What are you earning versus whatare you paying? Honestly, Chris,
I think it's
John Tripolsky (06:37):
you know, I I I know a bunch of, lenders and
real estate agents, so so I,this is me poking fun at them if
they ever happen to listen tous. But I think it's kind of
interesting that some of them.Yeah, I wouldn't call it part of
their pitch. Right. But when youlook at an amortization
schedule, sometimes they look atit as well, you know, this is
what you can afford.
And obviously I can't say I knowany of them that are too salesy
(07:00):
or unethical or anything likethat, where they're trying to
get you into something you can'tafford. But they're always like,
hey. If you make doublepayments, triple payments, you
could pay it off so muchquicker. So I think us, you know
and and my Canadian familyalways laughs at me because they
look at mortgages and and creditcard debt and everything
completely different, which isvery inter when we get together
for the holidays, I think it'sgreat. But I think we're
(07:22):
ingrained, you know, to when youown a home, the best thing you
could do is own your homeoutright.
But a lot of people, you know,maybe strive to that a little
too far. And and like you said,they almost overlook, you know,
opportunity costs. And and someof these other things I know
we're gonna get into. And, Imean, you gave the best example
starting there. Right?
Is if you're even if you have a5 or a 6%, you know, a mortgage,
(07:46):
we'll call it 55. So even ifyou're at 55, your average
checking account now, you'reprobably getting right around
there or a little bit more. I'veseen some of them that are 6 and
a half and and up from there. Soyou're right. I mean, you're
basically making a point a half.
You know what I mean? You'reyou're almost getting paid a
little for not paying off whatyou have in debt and not even
(08:08):
getting into the taxconsiderations.
Chris Picciurro (08:10):
Right. So you hit the one of the the other
second of 4 financialconsiderations is opportunity
cost. Opportunity cost is whatwhat are the other things that
you could do with that cash? Solet's take risk out of it.
Right?
Because typically there's acorrelation between rate of
return and risk, but let's sayyou have that money sitting in a
(08:31):
checking account or savingsaccount earning 4%. Let's say
your let's say your interest is3 a half percent on your
mortgage, but you are interestedin in a in a bond and that bond
is you feel safe and that bond'sgonna pay you 8%. Well, even
though paying the mortgage offmight make sense, your
(08:52):
opportunity cost is essentially8% for the bond, so you wanna
look at what are your otheroptions for that money if you
didn't pay the your mortgageoff. And we we say all the time
in our practice, no decision isa decision. We actually we say
it in life.
Right? No. Sometimes when youknow no decision is a decision.
And, you know, I'm sure with youand Stacy, you know, we we poke
(09:14):
fun our wives don't watch thisor listen to this. They
certainly don't watch it.
But, you know, they they we say,well, hey. What do you want for
dinner? I don't know. You'redriving down the road. How about
Mexican?
I don't care what you want. Idon't care. And then you say,
well, how about alright. Let'sget Mexican food. No.
I don't want that. Alright.Well, let's go grab pizza. Your
wife says, no. I don't want it.
Wait a sec. So you made adecision that you actually don't
(09:35):
want Mexican and you don't wantpizza. So in your no decision's
a decision. So, but theopportunity cost of the of those
bonds, you know, is important.Segwaying into this the 3rd
financial consideration isliquidity.
I mentioned liquidity in thevery beginning, but liquidity
means, do I have access to thosefunds? So let's say to to take
(09:57):
money and pay down a home equityline of credit, which is
typically a higher interest rateright now, and you could always
draw on that money if you neededit, most likely, that doesn't
hurt your liquidity. But if I'vegot a $100,000 of of saved up in
my savings and I have a mortgageof $100,000 and I pay it off, if
(10:20):
I need $10,000 due to afinancial emergency, I can't rip
a shingle off my house. Right?So you don't you you really
wanna keep as strive for, in myopinion, 3 to 6 months worth
worth of living expenses in yoursavings account.
And then maybe above that, I'dfeel comfortable paying down the
mortgage. So liquidity is the3rd financial consideration.
(10:41):
Then the 4th is really mental.It's it's having that debt free
mindset. And, John, you mailedit feeling like I, quote, own my
house, and I think that wasvery, very prevalent with, our
parents' generation and ourgrandparents' generation where
they wanted that feeling of of,you know, maybe they've had bad
(11:01):
experiences with banks.
Maybe they just, you know, quitefrankly, maybe they're mature
age and they're worriedsomething's going to happen or
they're going to forget to paytheir mortgage for a few months
and they're going to somehow thehouse is going to get foreclosed
and taken from them. So thatdebt free peace of mind, if it's
if that peace of mind isvaluable to you and, you know,
you're earning 3% at the bankand you're paying a 3% in
(11:24):
interest and you can afford topay that mortgage off, maybe
that peace of mind would bewould be the the tipping point.
And those are the 4 financialconsiderations.
John Tripolsky (11:34):
Right. And then, obviously, I mean, there you
know, we I think maybe 5 or 6episodes ago, I was just kinda
mentally trying to think about,right, we're talking about
interest rates back in theseventies eighties. They were a
lot different. I mean, what wasit? Maybe eighties, early
nineties.
I think that they average like14 and a half percent for your
average mortgage or someone onthose lines. So obviously if say
(11:55):
you're even at 10%. It's veryhard to find something that
you're making 10% interest onyear over year and comfortably.
So obviously, the thoughts weredifferent there. Maybe they
looked at it and kind ofmentally trained themselves and
others.
You know, from a financialsavings standpoint, you don't
want a mortgage if you can avoidit.
Chris Picciurro (12:13):
But that Yes. But oh, go ahead. I'm so yeah. I
mean, you you nailed it. In the8 in 19 eighties, the median
mortgage rate was 12.82%.
12.82 is a median, and it rangedfrom 9.03 to 18.63. That was in
the 19 eighties. That's a creditcard. That's wild. Exactly.
(12:36):
In the nineties, the medianmortgage rate was 7.88. It
ranged from about 6 a halfpercent to 10 2 thirds. So we're
still in a lower interest rateenvironment right now. Right.
John Tripolsky (12:46):
And then and then, you know, obviously, one
thing too. I mean, we weprobably won't go into this
today because this is more of aof a lending question. Right?
But, obviously, there's thelendability factor. Right?
Or you're you talked about yourDTI, you know, your debt to
income. Say you have a $3,000more $3,000 a month mortgage,
and all of a sudden you had ahad a life change and you're no
(13:06):
longer making 2, 3 100,400,000 ayear, you know, obviously that
kind of cuts you off at theknees a little bit as far as for
buying an investment, etcetera,etcetera. So obviously there's
reasons and planning that goesinto that.
Chris Picciurro (13:20):
Absolutely. And and, you know, Brenna Carls from
Mortgage Shop does an awesomejob talking about DTI or debt to
income ratios, and you nailthat. It it that's one of my x
factors. What are the other nonfinancial ramifications of of
paying off your mortgage? We'veseen it many times where if a
(13:41):
senior citizen wants to, let'ssay, purchase a home or wants
to, you know, or we like to saymature age person, wants to
purchase a home or refinance ahome.
They might have a significantamount of assets, but those
assets are in retirementaccounts, which they're gonna
pay tax on to take the moneyout, and they just don't have a
lot of income. They might haveSocial Security, a small a
(14:01):
small, pension. So even thoughthey have even though they might
have a 1,000,000 and a halfdollars in their IRA, they're
struggling to qualify for$300,000 mortgage. It sounds
crazy, but that's true. So xfactor would be, how does it
affect your credit and yourlendability, your in in your
debt, you know, debt debt toservice, ratios.
(14:25):
Debt to income, DTI debt toincome ratio. So
John Tripolsky (14:27):
And then, you know, we've done 88 episodes of
this and maybe about 30 episodesago. I think we had somebody on
and they they brought a new termto the table for us, and that
was situationally dependent.Yes. Situationally the primary.
So I think that's very fittingwith this one that depending on
what you want to do or what yourgoals are, planning, purpose,
etcetera, it is verysituationally dependent.
Chris Picciurro (14:50):
So let's talk situations and we talk about the
tax considerations when payingoff mortgage or keeping the
money in savings, that mortgageinterest deduction. So I was
talking about, hey. You'reearning 3% in your savings
account, but you get and you'repaying 3% to the bank. What we
have to remember is that yourmortgage interest is tax
deductible if you itemize yourdeductions. So, John, if you're
(15:12):
in the if you're in the to makeeasy numbers, if you're in the
25% marginal tax rate and you'repaying 6% on your mortgage
interest, you're really paying 4a half percent after tax.
So that's something to consider.Right? 20. You're out of the 6%
you're paying, you're getting atax, benefit. You're getting a
(15:33):
tax deduction of the entireamount of interest but times
that by your marginal tax rate.
What's the but conversely,conversely, excuse me, you're
also paying interest on theyou're paying income tax on the
interest income from the savingsaccount. So just because you're
getting paid 5%, let's sayyou're in the marginal 20%
(15:56):
marginal tax rate. Let's say thebank's paying you 5% on your
savings account. You're onlykeeping 4% if you're in the 20%
marginal tax bracket bracket. So20% of your interest would go to
uncle Sam.
We're not even talking aboutstate and local tax. So don't
just go apples to apples andwhat percent's higher should I
pay it off? Think about theafter tax, that's tax flow. Tax
(16:19):
flow and cash flow aren't thesame things. We know we it's one
of our 3 laws.
And factor in the mortgageinterest deduction and the
marginal tax rate on yourinterest income.
John Tripolsky (16:30):
Absolutely. That's a and that's a good one
too because I think some peoplemay forget about that too, Just
the the the deductionopportunity with those. Exactly.
And and so the second, you know,the second of 3 tax
considerations
Chris Picciurro (16:44):
well, well, we already went through one of the
the first two. 1, the mortgageinterest reduction and the the
effect of of that tax deductionon how much interest you're
paying after tax. To federal,state, and local income taxes on
any type of income you arereceiving, excuse me, from your
bank, credit union, etcetera, onthat interest income or maybe a
(17:05):
dividend if it's a it's a ifit's a credit union. The the
final thing on the taxconsiderations would be this. If
that money's in a brokerageaccount and you let's say you
bought John, you bought, youknow, Apple stock for $1,000.
Excuse me. It's worth $200,000and you sell the Apple stock and
pay down your $200,000 mortgage.What are you not factoring in?
(17:29):
You're not factoring in the capthe tax on that $199,000 capital
gain. So, yes, we said, shouldyou take money out of your
savings?
But if you're listening, bewary, be aware of if you're not
taking the money out of asavings, checking, or money
market account, what are the taxramifications if you were to
(17:50):
sell it at a capital gain? Or ifthat money is in, like, a pretax
kind of like a 401 k or an I orIRA, you might be looking at
your statement saying, oh, I'vegot $200,000 of cash in my IRA.
I'm just gonna take that cashand pay my mortgage off. Guess
what? It's gonna be taxable whenyou take it out of that IRA,
traditional IRA or 401 k.
(18:10):
Now if it's in a Roth and youcan make a qualified
distribution, now we don't haveto worry about that. So
John Tripolsky (18:17):
be aware of what type of account the cash or
savings is in that you're gonnause to pay the mortgage off. And
these are really good too withwhatever whatever somebody or
whoever somebody's working witha tax pro financial planner,
etcetera, right? Like this isit. We'll call it an objective
view. But as far as for playinginto it, right, like the we'll
(18:39):
call them, say you have thetaxpayer and the tax pro.
So 2 2 players on the same team,different positions. You're
looking at it from 2 differentsides. 1, say, taxpayer thinks
about it as like, wow. I do notwant this mortgage. I do not
wanna be paying for this everymonth.
I just, you know, laser focused.They don't want it. How can I
get rid of it? But like we werejust talking about, I think we
(19:01):
have at least 5 or 6 really,really good points there that
almost make you lean on theother side of the fence, as far
as for, you know, if you'recomfortable with it, we'll call
it the comfortability factor.Then the benefits far outweigh,
you know, just getting rid ofsomething, obviously, because,
you know, and the, the greatthing is, right?
I mean, depending on what kindof mortgage you're in, we'll but
(19:23):
we'll say 9.999 out of 10 ofthem. Mhmm. Your rate's not
gonna change. You know, it'sfixed. So you know what it's
gonna be like in 4, 10, 15years.
Chris Picciurro (19:32):
That's I mean, you nailed something too good.
Yeah. Mostly the rates are fixedunless you have an adjustable
rate mortgage or an ARM. Onemore thing to consider, you just
should've added it in thebeginning. Some mortgages,
especially on investmentproperties, might have a
prepayment penalty.
So you have to factor that in aswell. So I could say,
(19:53):
personally, we we we paid aprepayment penalty. We sold an
investment property once. We didfactor that penalty into our
profit, and we decided it wouldshow us a good idea, but it was
definitely a factor to consider,when you have a prepayment
penalty. So, yep, we have sohere's the situate wrapping it
up.
We have the financialconsiderations. We have tax
(20:15):
considerations. Then we havethese x factors. Could be it
could be the, you know, whatyour what your long term plan
is. Do you, you know, do youplan to stay at that house
forever?
Because, ultimately, the onlyway you're gonna get your your
cash back out of that housewould be to refinance or sell
it. You know? So those are allfactors. And what's that, what
(20:37):
does being debt free mean toyou? Is that important to you?
And what is, does that give youpeace of mind? In understanding
your liquidity and making surethat you have enough in your
savings to cover about 3 to 6months of expenses, and then I
would cons that would be myfinal takeaway is before you
consider, you know, depletingany savings, make sure you've
(20:58):
got at least 3 months of offixed living expenses in savings
before you do that. And always,John, consult a financial
adviser, licensed financialadviser, a tax professional, or
you know what? Just go into thedefeating taxes private Facebook
group and say hello.
John Tripolsky (21:15):
Absolutely. Absolutely, Chris. Well, thank
you so much for diving into thiswith us. I know at the beginning
we said we were gonna give awayall the answers. I doubt we gave
away all the answers because,right, it's so situationally
dependent back to that term.
And like you said too, it reallydoes come down. I mean, I see
this from both sides. Right?Obviously, we have these
(21:35):
conversations. You know, we talkto tons of individuals, tax
pros, taxpayers alike, andreally just talking with the
people on your team and planningfor it.
This this should never be a, oh,I'm gonna do this and I'm gonna
do this next week because thisis not a an oopsie situation.
Let me take back and and you'llset the reset button and do
(21:56):
something else. Like, once it'sdone, it's done. I mean, if
you're depleting an account andsay you don't end up using those
funds to pay off a mortgage,well, depending on what it is,
you already just triggered for amassive tax bill depending on
and then you're just sitting ona bunch of cash, and then you're
really up, you know, what acreek.
Chris Picciurro (22:14):
Oh, absolutely. I mean, it it could really
backfire if you let's say youtook the money out of retirement
account, paid off the mortgage.You don't have a mortgage, but
you have a tax bill. But now youdon't have any cash to pay it.
So just build that board ofdirectors we talk about in
teaching tax law.
Build your board of directors.If you don't have one, reach out
to John and I personally and wewill make sure we find someone
(22:37):
for you
John Tripolsky (22:37):
to help you. It's a great way to close it.
And as always, as I like to say,you know, maybe to end or not to
end, that is the better questionas Shakespeare did not say, nor
will he ever say because he's nolonger able to say that. But on
that note, we will see everybodyback here next week on the
Teaching Tax Flow podcast.Different day, similar time,
(23:01):
different topic.
Tweak that one a little bit. Sountil next time, everybody.
Thank you for joining us.
Chris Picciurro (23:10):
Hey, everybody.
John Tripolsky (23:13):
John here from the teaching tax flow team.
That's right. We just episode orwe just wrapped up episode 88.
Can you believe it? 88 of theseshows, you have been listening
to us go on and on and on andon.
However, I would like to say,I'll toot our horn a little bit
or or humble brag as sometimeswe like to say, we've had a ton
of listeners. We've hit, if I'mremembering right, 50 or 60
(23:36):
different countries. We'retalking tens and tens of
thousands of listeners on ourshows, which is great. We get
great feedback. We're hearingall these topics, people coming
up to us at events, emails,messages online saying that
they've heard heard us, heard atopic.
That's what we love to do.That's what we're here for, and
again, 88 weekly episodes wehave cranked through. However,
(23:57):
here's the ask. Keep the topicscoming. Not that we're running
out of ideas by any stretch ofimagination, but the whole point
of this show is to literallytalk on the topics that you guys
are interested in.
So if you're interested in atopic, just shoot us an email at
hello at teachingtaxflow.com.That's hello at teaching tax
flow dot com. Shoot us any ideasyou have. The worst thing that
(24:20):
could happen is, you know, wejust forward the email to Chris
and he can tell you no. So justkidding.
We won't do that. We take somegreat, great pride in these. And
again, we are here doing thesefor you. Shoot us those topics.
We love them.
That's what keeps us going. So,we will see everybody or you
should hear everybody, hear usnext week here back on the show.
Disclaimer (24:44):
The content provided is for educational purposes
only. We encourage you to seekpersonalized investment advice
from your financialprofessional. For all tax and
legal advice, please consultyour CPA or attorney. Investment
advisory services are offeredthrough Cabin Advisors, a
registered investment adviser.Securities are offered through
Cabin Securities, a registeredbroker dealer.
The content of this podcast doesnot constitute an offer of
(25:06):
securities. Offerings can onlybe made through an offering
memorandum, and you shouldcarefully examine the risk
factors and other informationcontained in the memorandum.
Welcome to the Teaching Tax Flow podcast, where the goal
is to empower and educate you tolegally and ethically minimize
taxes paid over your lifetime.
John Tripolsky (00:17):
Hey, everybody, and welcome back to the podcast
episode 88 today. We are gonnadive head first into should I
use my savings to pay off ormaybe pay down my mortgage or
your mortgage unless you'refeeling really, really generous
and you could pay mine? But inthat case, let's stop wasting
time and let's jump into itafter we hear from our episode
(00:39):
sponsor.
Ad Read (00:41):
This podcast is brought to you by Strategic Associates.
Are you a high income earner,real estate investor, or
successful entrepreneur who isfrustrated by having to pay
$75,000 or more of annual taxliability? If so, Strategic
Associates can help. Your firststep to saving 1,000, if not 100
of 1,000 is to contact RogerRoundy at roger@strategicag.net
(01:05):
or by calling 801-641-2956, andbe sure to tell them TTF sent
you.
John Tripolsky (01:13):
Alrighty, everybody. You heard the intro,
and the offer still stands. Ifyou're feeling really generous,
we have plenty of mortgages thatI'm sure you could pay off if
you really feel like it. Butlet's assume you're considering
paying off or paying down yourown mortgage with your savings,
your hard earned savings. We aregonna answer that question for
you.
So think of it as almost theShakespeare quote, right, of was
(01:36):
it to be or not to be? That isthe question. Well, the question
today is how do you use yoursavings? Obviously, for your
mortgage. So the best guy wecould bring to the table is the
bald, brawny, and beautiful,mister Pecuro.
How's it going, man?
Chris Picciurro (01:52):
Oh, I am great, John. How are you doing?
John Tripolsky (01:55):
Hey. Pretty good, man. Pretty good. This
one, I'm excited about this oneas always. I know I say that a
ton.
It's kind of me on repeat asalways. But this is a really
good topic because, right, somepeople think that, you know, we
won't say all debt is bad debt,but they look at a mortgage as
being a huge, you know,liability. It's a monthly bill
(02:16):
that they really don't wannapay. But ironically enough
though, right, somebody mighthave a we'll call it a $800
mortgage, but then they go andbuy a car that they're paying
more than $800 for, and they'recomfortable with that. So I look
forward to this one diving intoit.
You know, the the financialbenefits, tax benefits. I know
we're gonna digest this anddissect this a little bit. But,
(02:38):
honestly, I don't even know thebest place to start with it with
this topic. So I'm gonna kindathrow it over to you for that
one.
Chris Picciurro (02:43):
Well, it's a great topic, and apologize for
my voice being shot. Hadattended 5 days straight worth
of travel baseball world seriesplay for our youngest. So, but
feeling good, John. I was backdown in Panama City Beach,
Florida, the birthplace of thisyear podcast. Some memories
(03:04):
spewed out.
That's right. Every time
John Tripolsky (03:06):
I eat pizza, you know, I I think about it. You
know what's funny too? Thinkingof that podcast. It's almost
like the smell of pizza remindsme of our first podcast.
Probably because we wereliterally nose to Mike, all
huddled up on a couch on thelittle cheesy little $10
lavalier mic that hooked up toan iPhone and a pizza box.
But Well, it's good being
Chris Picciurro (03:26):
that we had mouthwash and toothpaste on that
trip.
John Tripolsky (03:29):
And and we're lucky that we like each other.
We could, you know, cuddle up onthe couch.
Chris Picciurro (03:33):
So Exactly. Exactly. Well, let's I don't
know. I can't even I can't evensegue cuddling into this into
this. So let's cuddle ourfinances here, but this is a
great topic.
I I kinda feel silly that ittook us almost 2 years into this
podcast, episode 88, to addressit, and I can't even take credit
(03:53):
for the topic. Someone in ourdefeating taxes private Facebook
group proposed this topic andand threw it out there for us.
And I thought, man, that's agreat, great topic. We had a
little bit of content on it thatpeople enjoyed. So, yeah, we're
in an interesting environment.
Interest rates have climbedquite a bit over the last couple
(04:13):
years. And there's people that,that have, through various
resources of work and whatever,have have stockpiled some some
assets, some cash. When we saycash, we're not talking about
necessarily physical dollarbills cash, although it could
be. We're talking about moneythat's real liquid. Okay?
So things liquid means you canaccess it quickly. So this would
(04:35):
be money in your checkingaccount, your money market
account, your savings account atyour typical credit union or
bank or brokerage account. So,you know, we we had this
question posed that, hey. IfI've got a mortgage let's say,
John, let's just say you have amortgage with a balance of
$200,000 and you've you've got$250,000 sitting in your bank
(04:56):
account, and you could basicallytake 200 of that 200 of that
200,000 of that and wipe outyour mortgage should you do it.
And when really it comes down toit is we've got different
factors.
Right? There are financialconsiderations, and then there
are tax considerations. And thenthere are x factors, I wanna
(05:17):
call them, because we like xfactors. We all we use that x
factor when we talk about how topick a tax professional. But,
but yeah.
So we've got financialconsiderations and tax
considerations. Let's talk firston the financial considerations
because the first thing you haveto figure is this. It's it's
real simple. Take the taxbenefit tax part out of it. What
(05:38):
rate of return are you gettingon that savings versus what is
your mortgage interest rate?
So luckily, many people listento the show and know that my
wife and I relocated fromMichigan to Franklin, Tennessee
about 8 years ago. A coupleyears after we relocated, we
refinanced our home. Luckily,interest rates were at 3% at
that point. So our interest rateis super low on our on our
(06:01):
property and our main residenceand our primary residence, I
should say. So So if I'm gettingpaid 5%, 6% from the bank,
credit union, etcetera, does itmake sense to take money out of
that that account that I'mearning 5, 6% to pay down or pay
off a mortgage that I'm onlypaying 3% interest on?
(06:23):
So you've got to really thinkabout the on the first first
financial consideration is thinkabout the interest rate. Right?
What are you earning versus whatare you paying? Honestly, Chris,
I think it's
John Tripolsky (06:37):
you know, I I I know a bunch of, lenders and
real estate agents, so so I,this is me poking fun at them if
they ever happen to listen tous. But I think it's kind of
interesting that some of them.Yeah, I wouldn't call it part of
their pitch. Right. But when youlook at an amortization
schedule, sometimes they look atit as well, you know, this is
what you can afford.
And obviously I can't say I knowany of them that are too salesy
(07:00):
or unethical or anything likethat, where they're trying to
get you into something you can'tafford. But they're always like,
hey. If you make doublepayments, triple payments, you
could pay it off so muchquicker. So I think us, you know
and and my Canadian familyalways laughs at me because they
look at mortgages and and creditcard debt and everything
completely different, which isvery inter when we get together
for the holidays, I think it'sgreat. But I think we're
(07:22):
ingrained, you know, to when youown a home, the best thing you
could do is own your homeoutright.
But a lot of people, you know,maybe strive to that a little
too far. And and like you said,they almost overlook, you know,
opportunity costs. And and someof these other things I know
we're gonna get into. And, Imean, you gave the best example
starting there. Right?
Is if you're even if you have a5 or a 6%, you know, a mortgage,
(07:46):
we'll call it 55. So even ifyou're at 55, your average
checking account now, you'reprobably getting right around
there or a little bit more. I'veseen some of them that are 6 and
a half and and up from there. Soyou're right. I mean, you're
basically making a point a half.
You know what I mean? You'reyou're almost getting paid a
little for not paying off whatyou have in debt and not even
(08:08):
getting into the taxconsiderations.
Chris Picciurro (08:10):
Right. So you hit the one of the the other
second of 4 financialconsiderations is opportunity
cost. Opportunity cost is whatwhat are the other things that
you could do with that cash? Solet's take risk out of it.
Right?
Because typically there's acorrelation between rate of
return and risk, but let's sayyou have that money sitting in a
(08:31):
checking account or savingsaccount earning 4%. Let's say
your let's say your interest is3 a half percent on your
mortgage, but you are interestedin in a in a bond and that bond
is you feel safe and that bond'sgonna pay you 8%. Well, even
though paying the mortgage offmight make sense, your
(08:52):
opportunity cost is essentially8% for the bond, so you wanna
look at what are your otheroptions for that money if you
didn't pay the your mortgageoff. And we we say all the time
in our practice, no decision isa decision. We actually we say
it in life.
Right? No. Sometimes when youknow no decision is a decision.
And, you know, I'm sure with youand Stacy, you know, we we poke
(09:14):
fun our wives don't watch thisor listen to this. They
certainly don't watch it.
But, you know, they they we say,well, hey. What do you want for
dinner? I don't know. You'redriving down the road. How about
Mexican?
I don't care what you want. Idon't care. And then you say,
well, how about alright. Let'sget Mexican food. No.
I don't want that. Alright.Well, let's go grab pizza. Your
wife says, no. I don't want it.
Wait a sec. So you made adecision that you actually don't
(09:35):
want Mexican and you don't wantpizza. So in your no decision's
a decision. So, but theopportunity cost of the of those
bonds, you know, is important.Segwaying into this the 3rd
financial consideration isliquidity.
I mentioned liquidity in thevery beginning, but liquidity
means, do I have access to thosefunds? So let's say to to take
(09:57):
money and pay down a home equityline of credit, which is
typically a higher interest rateright now, and you could always
draw on that money if you neededit, most likely, that doesn't
hurt your liquidity. But if I'vegot a $100,000 of of saved up in
my savings and I have a mortgageof $100,000 and I pay it off, if
(10:20):
I need $10,000 due to afinancial emergency, I can't rip
a shingle off my house. Right?So you don't you you really
wanna keep as strive for, in myopinion, 3 to 6 months worth
worth of living expenses in yoursavings account.
And then maybe above that, I'dfeel comfortable paying down the
mortgage. So liquidity is the3rd financial consideration.
(10:41):
Then the 4th is really mental.It's it's having that debt free
mindset. And, John, you mailedit feeling like I, quote, own my
house, and I think that wasvery, very prevalent with, our
parents' generation and ourgrandparents' generation where
they wanted that feeling of of,you know, maybe they've had bad
(11:01):
experiences with banks.
Maybe they just, you know, quitefrankly, maybe they're mature
age and they're worriedsomething's going to happen or
they're going to forget to paytheir mortgage for a few months
and they're going to somehow thehouse is going to get foreclosed
and taken from them. So thatdebt free peace of mind, if it's
if that peace of mind isvaluable to you and, you know,
you're earning 3% at the bankand you're paying a 3% in
(11:24):
interest and you can afford topay that mortgage off, maybe
that peace of mind would bewould be the the tipping point.
And those are the 4 financialconsiderations.
John Tripolsky (11:34):
Right. And then, obviously, I mean, there you
know, we I think maybe 5 or 6episodes ago, I was just kinda
mentally trying to think about,right, we're talking about
interest rates back in theseventies eighties. They were a
lot different. I mean, what wasit? Maybe eighties, early
nineties.
I think that they average like14 and a half percent for your
average mortgage or someone onthose lines. So obviously if say
(11:55):
you're even at 10%. It's veryhard to find something that
you're making 10% interest onyear over year and comfortably.
So obviously, the thoughts weredifferent there. Maybe they
looked at it and kind ofmentally trained themselves and
others.
You know, from a financialsavings standpoint, you don't
want a mortgage if you can avoidit.
Chris Picciurro (12:13):
But that Yes. But oh, go ahead. I'm so yeah. I
mean, you you nailed it. In the8 in 19 eighties, the median
mortgage rate was 12.82%.
12.82 is a median, and it rangedfrom 9.03 to 18.63. That was in
the 19 eighties. That's a creditcard. That's wild. Exactly.
(12:36):
In the nineties, the medianmortgage rate was 7.88. It
ranged from about 6 a halfpercent to 10 2 thirds. So we're
still in a lower interest rateenvironment right now. Right.
John Tripolsky (12:46):
And then and then, you know, obviously, one
thing too. I mean, we weprobably won't go into this
today because this is more of aof a lending question. Right?
But, obviously, there's thelendability factor. Right?
Or you're you talked about yourDTI, you know, your debt to
income. Say you have a $3,000more $3,000 a month mortgage,
and all of a sudden you had ahad a life change and you're no
(13:06):
longer making 2, 3 100,400,000 ayear, you know, obviously that
kind of cuts you off at theknees a little bit as far as for
buying an investment, etcetera,etcetera. So obviously there's
reasons and planning that goesinto that.
Chris Picciurro (13:20):
Absolutely. And and, you know, Brenna Carls from
Mortgage Shop does an awesomejob talking about DTI or debt to
income ratios, and you nailthat. It it that's one of my x
factors. What are the other nonfinancial ramifications of of
paying off your mortgage? We'veseen it many times where if a
(13:41):
senior citizen wants to, let'ssay, purchase a home or wants
to, you know, or we like to saymature age person, wants to
purchase a home or refinance ahome.
They might have a significantamount of assets, but those
assets are in retirementaccounts, which they're gonna
pay tax on to take the moneyout, and they just don't have a
lot of income. They might haveSocial Security, a small a
(14:01):
small, pension. So even thoughthey have even though they might
have a 1,000,000 and a halfdollars in their IRA, they're
struggling to qualify for$300,000 mortgage. It sounds
crazy, but that's true. So xfactor would be, how does it
affect your credit and yourlendability, your in in your
debt, you know, debt debt toservice, ratios.
(14:25):
Debt to income, DTI debt toincome ratio. So
John Tripolsky (14:27):
And then, you know, we've done 88 episodes of
this and maybe about 30 episodesago. I think we had somebody on
and they they brought a new termto the table for us, and that
was situationally dependent.Yes. Situationally the primary.
So I think that's very fittingwith this one that depending on
what you want to do or what yourgoals are, planning, purpose,
etcetera, it is verysituationally dependent.
Chris Picciurro (14:50):
So let's talk situations and we talk about the
tax considerations when payingoff mortgage or keeping the
money in savings, that mortgageinterest deduction. So I was
talking about, hey. You'reearning 3% in your savings
account, but you get and you'repaying 3% to the bank. What we
have to remember is that yourmortgage interest is tax
deductible if you itemize yourdeductions. So, John, if you're
(15:12):
in the if you're in the to makeeasy numbers, if you're in the
25% marginal tax rate and you'repaying 6% on your mortgage
interest, you're really paying 4a half percent after tax.
So that's something to consider.Right? 20. You're out of the 6%
you're paying, you're getting atax, benefit. You're getting a
(15:33):
tax deduction of the entireamount of interest but times
that by your marginal tax rate.
What's the but conversely,conversely, excuse me, you're
also paying interest on theyou're paying income tax on the
interest income from the savingsaccount. So just because you're
getting paid 5%, let's sayyou're in the marginal 20%
(15:56):
marginal tax rate. Let's say thebank's paying you 5% on your
savings account. You're onlykeeping 4% if you're in the 20%
marginal tax bracket bracket. So20% of your interest would go to
uncle Sam.
We're not even talking aboutstate and local tax. So don't
just go apples to apples andwhat percent's higher should I
pay it off? Think about theafter tax, that's tax flow. Tax
(16:19):
flow and cash flow aren't thesame things. We know we it's one
of our 3 laws.
And factor in the mortgageinterest deduction and the
marginal tax rate on yourinterest income.
John Tripolsky (16:30):
Absolutely. That's a and that's a good one
too because I think some peoplemay forget about that too, Just
the the the deductionopportunity with those. Exactly.
And and so the second, you know,the second of 3 tax
considerations
Chris Picciurro (16:44):
well, well, we already went through one of the
the first two. 1, the mortgageinterest reduction and the the
effect of of that tax deductionon how much interest you're
paying after tax. To federal,state, and local income taxes on
any type of income you arereceiving, excuse me, from your
bank, credit union, etcetera, onthat interest income or maybe a
(17:05):
dividend if it's a it's a ifit's a credit union. The the
final thing on the taxconsiderations would be this. If
that money's in a brokerageaccount and you let's say you
bought John, you bought, youknow, Apple stock for $1,000.
Excuse me. It's worth $200,000and you sell the Apple stock and
pay down your $200,000 mortgage.What are you not factoring in?
(17:29):
You're not factoring in the capthe tax on that $199,000 capital
gain. So, yes, we said, shouldyou take money out of your
savings?
But if you're listening, bewary, be aware of if you're not
taking the money out of asavings, checking, or money
market account, what are the taxramifications if you were to
(17:50):
sell it at a capital gain? Or ifthat money is in, like, a pretax
kind of like a 401 k or an I orIRA, you might be looking at
your statement saying, oh, I'vegot $200,000 of cash in my IRA.
I'm just gonna take that cashand pay my mortgage off. Guess
what? It's gonna be taxable whenyou take it out of that IRA,
traditional IRA or 401 k.
(18:10):
Now if it's in a Roth and youcan make a qualified
distribution, now we don't haveto worry about that. So
John Tripolsky (18:17):
be aware of what type of account the cash or
savings is in that you're gonnause to pay the mortgage off. And
these are really good too withwhatever whatever somebody or
whoever somebody's working witha tax pro financial planner,
etcetera, right? Like this isit. We'll call it an objective
view. But as far as for playinginto it, right, like the we'll
(18:39):
call them, say you have thetaxpayer and the tax pro.
So 2 2 players on the same team,different positions. You're
looking at it from 2 differentsides. 1, say, taxpayer thinks
about it as like, wow. I do notwant this mortgage. I do not
wanna be paying for this everymonth.
I just, you know, laser focused.They don't want it. How can I
get rid of it? But like we werejust talking about, I think we
(19:01):
have at least 5 or 6 really,really good points there that
almost make you lean on theother side of the fence, as far
as for, you know, if you'recomfortable with it, we'll call
it the comfortability factor.Then the benefits far outweigh,
you know, just getting rid ofsomething, obviously, because,
you know, and the, the greatthing is, right?
I mean, depending on what kindof mortgage you're in, we'll but
(19:23):
we'll say 9.999 out of 10 ofthem. Mhmm. Your rate's not
gonna change. You know, it'sfixed. So you know what it's
gonna be like in 4, 10, 15years.
Chris Picciurro (19:32):
That's I mean, you nailed something too good.
Yeah. Mostly the rates are fixedunless you have an adjustable
rate mortgage or an ARM. Onemore thing to consider, you just
should've added it in thebeginning. Some mortgages,
especially on investmentproperties, might have a
prepayment penalty.
So you have to factor that in aswell. So I could say,
(19:53):
personally, we we we paid aprepayment penalty. We sold an
investment property once. We didfactor that penalty into our
profit, and we decided it wouldshow us a good idea, but it was
definitely a factor to consider,when you have a prepayment
penalty. So, yep, we have sohere's the situate wrapping it
up.
We have the financialconsiderations. We have tax
(20:15):
considerations. Then we havethese x factors. Could be it
could be the, you know, whatyour what your long term plan
is. Do you, you know, do youplan to stay at that house
forever?
Because, ultimately, the onlyway you're gonna get your your
cash back out of that housewould be to refinance or sell
it. You know? So those are allfactors. And what's that, what
(20:37):
does being debt free mean toyou? Is that important to you?
And what is, does that give youpeace of mind? In understanding
your liquidity and making surethat you have enough in your
savings to cover about 3 to 6months of expenses, and then I
would cons that would be myfinal takeaway is before you
consider, you know, depletingany savings, make sure you've
(20:58):
got at least 3 months of offixed living expenses in savings
before you do that. And always,John, consult a financial
adviser, licensed financialadviser, a tax professional, or
you know what? Just go into thedefeating taxes private Facebook
group and say hello.
John Tripolsky (21:15):
Absolutely. Absolutely, Chris. Well, thank
you so much for diving into thiswith us. I know at the beginning
we said we were gonna give awayall the answers. I doubt we gave
away all the answers because,right, it's so situationally
dependent back to that term.
And like you said too, it reallydoes come down. I mean, I see
this from both sides. Right?Obviously, we have these
(21:35):
conversations. You know, we talkto tons of individuals, tax
pros, taxpayers alike, andreally just talking with the
people on your team and planningfor it.
This this should never be a, oh,I'm gonna do this and I'm gonna
do this next week because thisis not a an oopsie situation.
Let me take back and and you'llset the reset button and do
(21:56):
something else. Like, once it'sdone, it's done. I mean, if
you're depleting an account andsay you don't end up using those
funds to pay off a mortgage,well, depending on what it is,
you already just triggered for amassive tax bill depending on
and then you're just sitting ona bunch of cash, and then you're
really up, you know, what acreek.
Chris Picciurro (22:14):
Oh, absolutely. I mean, it it could really
backfire if you let's say youtook the money out of retirement
account, paid off the mortgage.You don't have a mortgage, but
you have a tax bill. But now youdon't have any cash to pay it.
So just build that board ofdirectors we talk about in
teaching tax law.
Build your board of directors.If you don't have one, reach out
to John and I personally and wewill make sure we find someone
(22:37):
for you
John Tripolsky (22:37):
to help you. It's a great way to close it.
And as always, as I like to say,you know, maybe to end or not to
end, that is the better questionas Shakespeare did not say, nor
will he ever say because he's nolonger able to say that. But on
that note, we will see everybodyback here next week on the
Teaching Tax Flow podcast.Different day, similar time,
(23:01):
different topic.
Tweak that one a little bit. Sountil next time, everybody.
Thank you for joining us.
Chris Picciurro (23:10):
Hey, everybody.
John Tripolsky (23:13):
John here from the teaching tax flow team.
That's right. We just episode orwe just wrapped up episode 88.
Can you believe it? 88 of theseshows, you have been listening
to us go on and on and on andon.
However, I would like to say,I'll toot our horn a little bit
or or humble brag as sometimeswe like to say, we've had a ton
of listeners. We've hit, if I'mremembering right, 50 or 60
(23:36):
different countries. We'retalking tens and tens of
thousands of listeners on ourshows, which is great. We get
great feedback. We're hearingall these topics, people coming
up to us at events, emails,messages online saying that
they've heard heard us, heard atopic.
That's what we love to do.That's what we're here for, and
again, 88 weekly episodes wehave cranked through. However,
(23:57):
here's the ask. Keep the topicscoming. Not that we're running
out of ideas by any stretch ofimagination, but the whole point
of this show is to literallytalk on the topics that you guys
are interested in.
So if you're interested in atopic, just shoot us an email at
hello at teachingtaxflow.com.That's hello at teaching tax
flow dot com. Shoot us any ideasyou have. The worst thing that
(24:20):
could happen is, you know, wejust forward the email to Chris
and he can tell you no. So justkidding.
We won't do that. We take somegreat, great pride in these. And
again, we are here doing thesefor you. Shoot us those topics.
We love them.
That's what keeps us going. So,we will see everybody or you
should hear everybody, hear usnext week here back on the show.
Disclaimer (24:44):
The content provided is for educational purposes
only. We encourage you to seekpersonalized investment advice
from your financialprofessional. For all tax and
legal advice, please consultyour CPA or attorney. Investment
advisory services are offeredthrough Cabin Advisors, a
registered investment adviser.Securities are offered through
Cabin Securities, a registeredbroker dealer.
The content of this podcast doesnot constitute an offer of
(25:06):
securities. Offerings can onlybe made through an offering
memorandum, and you shouldcarefully examine the risk
factors and other informationcontained in the memorandum.
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Las Culturistas with Matt Rogers and Bowen Yang
Ding dong! Join your culture consultants, Matt Rogers and Bowen Yang, on an unforgettable journey into the beating heart of CULTURE. Alongside sizzling special guests, they GET INTO the hottest pop-culture moments of the day and the formative cultural experiences that turned them into Culturistas. Produced by the Big Money Players Network and iHeartRadio.