Episode 15 | Should I Pay Off My Mortgage Early?
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Shallon Weis, CFP, AIF:Alright, Jim. Let's be honest. How many times have we gotten this question? Should I pay off my mortgage early?
Jim Tausz, CFP, AIF:Well, I'm funny you should say that, Shallon. Easily once a week. Sometimes twice before lunch even. It comes up with retirees, young professionals, and even folks buying their first home.
Shallon Weis, CFP, AIF:Right, and it's one of those questions that sounds simple, but when you actually unpack it, it's got layers, like a financial onion or lasagna. Let's go with lasagna. That sounds tastier.
Jim Tausz, CFP, AIF:Yes. I'll take the lasagna or onions any day. And you're absolutely right, Chellen. It feels great to be mortgage free. No doubt about it.
Jim Tausz, CFP, AIF:That's an emotional win and a motivational thing to go for. But does it take sense for you to make long term plans in order to get where you're going? Well, that's where the real work comes in, and we're here to help you make that happen.
Shallon Weis, CFP, AIF:So today, we're digging into the pros and cons of paying off your mortgage early, when it might be smart, when it might not, and how you can think through it based on your goals.
Jim Tausz, CFP, AIF:Plus, stick around for our five on five segment at the end. We're sharing five very smart mortgage strategies that could save you years and years of payments and thousands and thousands dollars of interest, and who couldn't spend that dollar somewhere else? But put it where it's needed, and this is one way to do it.
Shallon Weis, CFP, AIF:So let's get into it. And so today's episode is one of the most common questions we hear as advisors. Should I pay off my mortgage early? We'll break down the pros, cons, and key considerations so you can decide what makes the most sense for your unique wealth journey.
Jim Tausz, CFP, AIF:And don't miss the end of the show. Our five on five segment will highlight five mortgage strategies that could make a very big difference to your bottom line.
Shallon Weis, CFP, AIF:Let's start with why this question even comes up. For many, their mortgage is the largest debt that they'll ever carry, and there's peace of mind in being debt free, especially heading into retirement.
Jim Tausz, CFP, AIF:Right. Psychologically owning your home outright can feel like real financial freedom at its best. But the feeling needs to be balanced against the opportunity of cost of what your money could be doing elsewhere as well, like investing in the market or maybe funding a retirement account as examples. I like numbers and data, so I think this quote unquote state of the mortgage debt of America is kind of investing that we need to be looking at. Just check this out, Shallan.
Jim Tausz, CFP, AIF:As of the first quarter of twenty twenty five, mortgage debt, including home equity loans, accounted for, believe it or not, a whopping $13,000,000,000,000 amount, making up actually 73.8% of the total US consumer debt. That's a whopping big number, isn't it? This represents an increase of $11,000,000,000 from the previous quarter, quarter four in 02/2024, bringing the total to $12,610,000,000,000 That's just not a small amount of money. That's a huge amount of money. And for the first mortgages, it accounted for about 95.8% of mortgage debt, while the home equity lines of credit, or the HELOCs, made up a 2.7%.
Shallon Weis, CFP, AIF:Yeeks. That's a lot of debt. Just hearing those numbers probably makes some of us feel the burden of our own mortgage debt. But the psychological mind battle is exactly what we're talking about here, the emotional side versus the financial logic side. So the heart says yes, but the head needs to run the numbers.
Shallon Weis, CFP, AIF:Now I know a couple who are weighing whether they should make extra principal payments to pay their mortgage off early. But as we look at their current mortgage interest rate, it's 3.99%. This is a situation where I'd rather see them invest that extra principal payment at even a baseline of 6%. So in their case, that's cheap money they have tied up. And paying it off early doesn't behoove them if they could be earning 6% on that money that they're saving.
Shallon Weis, CFP, AIF:You see, it's a matter of running the numbers.\
Jim Tausz, CFP, AIF:Great point, Shalyn. I think that's the same for a lot of Americans out there. It's a mic drop tip there, I might say, as well. Of course, we do know there can some pros of paying off your mortgage early, and let's explore some of these situations so that we can examine it. So let's put those on the table right now.
Jim Tausz, CFP, AIF:For example, first, the most obvious, is eliminate the monthly payment. That actually does free up your cash flow and reduces your expenses. That can be a very big deal in your life of finance.
Shallon Weis, CFP, AIF:And second, paying off a mortgage early reduces the total interest paid over the life of the loan, potentially saving thousands of dollars in interest over the life of the loan, especially if you're in the early years when most payments go toward interest. Jim, didn't you hate seeing that mortgage statement in those early years and the breakdown of how much interest you paid?
Jim Tausz, CFP, AIF:Holy smokes, Shallon. That's hard to swallow, to say the least. But the good part of it is that the lending allows a lot of us to afford homeownership and also build equity at the same time. You can hardly beat those two combinations. I think another pro of paying off your mortgage early would be when you're entering a volatile market or an uncertain retirement year.
Jim Tausz, CFP, AIF:Or not having a mortgage payment can offer huge peace of mind and makes you and allows you to sleep late at night and also early into the morning. Debt is necessary to do that, as I said. But not having it feels rewarding, and it can allow you to actually pursue.
Shallon Weis, CFP, AIF:Now let's talk about cons. And the biggest one is liquidity. Once you put that lump sum into your house, it's no longer easily accessible in an emergency. Cash on hand is wise in markets like this, where there's opportunities to buy or invest avail themselves if we're watching the markets closely.
Jim Tausz, CFP, AIF:Look. Mortgage rates have been higher compared to pre pandemic rates, but they are on a par with what we saw in the nineties as well. So, you know, to your earlier point, Sheldon, depending on what you actually secure for your mortgage interest rate's a big deal. You might learn more by investing that money than actually that you saved in interest. So you need to think about that.
Jim Tausz, CFP, AIF:Can you earn more, or should you pay it off and not pay that interest? Well, that remains to be seen and depends on each loan that you're dealing with.
Shallon Weis, CFP, AIF:And true. And don't forget about tax implications. You could lose out on mortgage interest deductions depending on your situation and how the IRS adjust thresholds, but that's where it's best to talk with a financial advisor or tax advisor on those implications because reducing our tax liability is a key part of smart financial management.
Jim Tausz, CFP, AIF:So you might think, how do I decide? You might say to yourself. Here are a few questions to ask, so this may help all of you out there. Do you have another higher interest rate debt? In other words, if you have other higher interest rate debt, that makes a difference as well.
Jim Tausz, CFP, AIF:So if you've got debt on credit card and are paying a minimum payment, you're really getting hit with up to 22% interest in some cases on that debt. You need to start paying that off first because 22% can really put a chokehold on your finances. Are you maxing out on your retirement savings? A smart move is to max that out first before you take what you could be taking, putting into tax free investing, and use it towards your four or 5% mortgage. And then you might also take a look at do you have a healthy emergency fund?
Jim Tausz, CFP, AIF:We just got done talking about that not long ago, and I think it's a gray area for a lot of people. So let's think about that a little bit. I like what it does when the numbers look like they should. In fact, we've touched on this in our very first episode that was on the topic of budgeting, if you remember correctly.
Shallon Weis, CFP, AIF:So if you answered no to any of those questions, it might make sense to direct your dollars elsewhere before focusing on your mortgage. Right.
Jim Tausz, CFP, AIF:Yes. But if you're debt free, otherwise, to retirement perhaps, or looking for stability, paying off your mortgage early could be the right move. It just depends.
Shallon Weis, CFP, AIF:I like to also think of it as it's not all or nothing. You can pay extra toward the principal each month without fully paying it off. Those are small ways that can reduce your payoff by a few years depending on when you start.
Announcer:In our last five minutes, we'll bring listeners a roundup of five smart ideas they can apply to their own wealth journeys. So let's get started with this episode's five and five.
Shallon Weis, CFP, AIF:And now it's time for our five and five segment. Five practical mortgage strategies in five minutes to help you think outside the thirty year box.
Jim Tausz, CFP, AIF:Strategy number one, for example, biweekly payments. People hear about them. Some people do something about it. Some don't. But instead of one monthly payment, what a bi weekly does is splits it into two actually every other week.
Jim Tausz, CFP, AIF:And so you don't have one payment, you have two payments. You'll end up making one extra full payment per year, and actually will save years off your loan plan. It can make a real big difference to your bottom line.
Shallon Weis, CFP, AIF:And strategy number two is to round up. Round up your monthly payment to the nearest $100. It's a small adjustment that really makes a big difference over time.
Jim Tausz, CFP, AIF:Strategy number three is refinance smarter. Look, not just sooner. If you haven't financed or refinanced in the last few years, shop the rates around. In other words, you're not gonna have the best rate unless you look around for it, and then when you find it, do something about it. But it also, you should at the same time compare to the closing costs and how long that you plan to pay and stay in the home as well.
Jim Tausz, CFP, AIF:All these
Announcer:fixed.
Jim Tausz, CFP, AIF:Strategy number five, mortgage plus investment combo. Listen. For some, continuing to make mortgage payments while investing extra cash actually in a diversified portfolio may offer a better long term return. But this also requires discipline and also a solid risk tolerance, so make sure that you cover those bases. A professional can help you get to the right spot at the right time.
Shallon Weis, CFP, AIF:So, should you pay off your mortgage early? Like most things in finance, it depends. Your goals, your stage of life, and your risk tolerance all matter.
Jim Tausz, CFP, AIF:Listen. Here's where I'm coming from, and I want you to listen carefully. Talk with your financial advisor. Weigh the emotional reward and also what the plan is gonna do for your financial situation. There's no one size fits all answer to this question, believe me.
Jim Tausz, CFP, AIF:But there is a best answer for you, and that's what you need to find because this needs to be your plan, not somebody else's plan.
Shallon Weis, CFP, AIF:And thanks for joining us today on Your Wealth Journey. If you found this helpful, subscribe, share the episode, and reach out with your mortgage questions. We love helping clients make smart moves with confidence.
Jim Tausz, CFP, AIF:And remember, every financial decision should move you closer to the future that you want to have. Until next time, take care of your wealth and yourself, and may you find yourself in a good spot financially for the rest of your life.
Shallon Weis, CFP, AIF:Remember your financial journey is our priority, and we're here to help you navigate it successfully. So until next time, take care and plan wisely.
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