Pros and Cons of Paying Off Your Mortgage Early
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2 жыл бұрынI've been in the business of giving financial advice for over 20 years and during my time in the business, one of the most asked questions is "Should I pay off my home mortgage early?" In this video, learn about the pros and cons of paying off a 3%, a 6% or a 9% mortgage early from CERTIFIED FINANCIAL PLANNER™ Professional Colin Exelby.
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@sinclabs 2 жыл бұрын
Its not always about the write off or return. Its also about risk. You never know what tomorrow brings.... job loss, health challenges for yourself or loved ones. A paid off mortgage means sleeping well and not worrying about debt. Quality of life is where its at. Slave to debt is slavery.
@seetheforestthroughthetrees 2 жыл бұрын
@david sanders thanks for watching and great comment! Everyone's situation is different. If you don't mind me asking, are there any financial planning or investment topics that you would like to see me discuss? I am always looking for ideas on how to improve people's quality of life.
@analyticreason 2 жыл бұрын
@@seetheforestthroughthetrees I have access to a 457 and 401k. Both have the Roth option. I can max out both at the max. Do I go both roth, both traditional, or a combination of both
@afternoononthedock 2 жыл бұрын
That was really well explained! Thank you, I took notes.
@seetheforestthroughthetrees 2 жыл бұрын
Glad it was helpful! Thanks for watching
@MP-nj1qy 2 жыл бұрын
Great video. I own two homes and one is a rental. Since I can't refinance the rental for a lower interest, I'm planning on paying it off in December 2022. I work in healthcare, and the peace of mind knowing that I can quit if the pandemic get worse is the reason why I rather not hold on to two mortgages. I can then use the income from the rental to pay off my other debt ( student loans mainly). Your video makes sense. Everyone had to evaluate their personal situation.
@seetheforestthroughthetrees 2 жыл бұрын
@MP that's great! Thanks for watching and glad the video brought you some value. As another commenter said, financial planning isn't always about the numbers, it is about peace of mind. Now, if you can combine both then that is 💯! Using income from assets to pay off debt is a great way to increase net worth faster than just paying down debt. As I prepare for new videos, are there any topics you would like to hear more about?
@cherylbroadenax1006 2 жыл бұрын
M. P. I have a rental also which is paid off. I purchased my primary resident oct 2020. Made first payment dec 2020 for 242k. As of October 2021 I am down to 167k. Working to pay off primary. Currently age 64. So I don’t want to go into the 2nd half of my life with debt. Plan to pay off primary in 2 more yrs. no others bills. Thank God.
@seetheforestthroughthetrees 2 жыл бұрын
Awesome @cheryl! Thanks for watching! How long did it take to pay off the rental from when you bought it?
@cherylbroadenax1006 2 жыл бұрын
@@seetheforestthroughthetrees I purchased rental 1 and my primary in 2005. After about 8 yrs I thought I might want to pay this one off so I got busy paying a lot towards interest. The one I am in now I purchased 2020. And rented out my primary house which was my primary but now my 2nd rental. It has $650 cash flow so I am not concerned with paying this one off the 2nd rental just yet. At age 64, I am thankful to have one rental paid off. My goal to pay off my new primary house by 2023 December.
@seetheforestthroughthetrees 2 жыл бұрын
Gotcha. So it was a change in strategy in about 2013, when you decided to pay more toward principal. Did the funds come from rent, or selling stock or somewhere else? Ever any thought to refinancing the property to acquire a 3rd rental?
@winniethepoohandeeyore2 2 жыл бұрын
Paying my mortgage @ 2. 875% off in 8 years when we hit 65 is my TOP priority. Been paying extra on my principle since our first mortgage payment was due in June 2021, Already knocked almost 3 years off the life of the mortgage. Once we hit 65 property tax stops. I am very fine with no longer having a mortgage and property taxes anymore. Just paying home owner's insurance, utilities, maint and upkeep is fine with me! The economy can totally crumble but I will have a paid for roof over my head and zero property taxes at 65. NOT having those bills anymore INCREASES MY ASSETS.
@seetheforestthroughthetrees 2 жыл бұрын
That's great to hear and thanks for watching. Every situation is different which is why perspective like this is great! For me, 2.875% 30 year money is really, really cheap capital. So, investing in assets that make more than that have appeal to me. We may never see rates like that ever again. But, your thought process is spot on if you want to be mentally free of a mortgage. Have you thought about ideas like, what if you put those extra payments into I Bonds for a year or two? Current interest rates are 9.62% annualized. Say, the rate levels off around 5-6% for the next few years. You could earn that interest and then pay a big chunk of the loan off in a few years? *This is for educational purposes and is not personal planning or investment advice. You should consult with your tax and financial advisors before implementing any strategy.
@charlesbyrneShowComments4all Жыл бұрын
Our mortgage rate is 2.875% for 20 years. We've been paying additional principal, at minimum, as if it were a 15 year. We are trying to balance early payoff with retirement, kids college and other future upcoming costs. So available cash will be allocated at a smaller percent to the additional mortgage principal. If it were consumer credit debt with higher rates like 20% or more it would be a no brainer because that would be a 20% tax free return on our investment. Since we have no credit card debt it is now an issue of risk management and retirement security. We have Roths and pre-tax retirement options so we also have to consider the future tax rates and social security tax and how the pre-tax investment will affect them when we retire. So not having a mortgage at retirement simplifies our options, but again we need to get some benefit of the magic of compounded earnings as well even if it is pre-tax and tad rates rise and those earnings we withdraw affect social security, Medicare etc. Their is no easy answer. It's just consulting with a planner and finding out what best works for your family.
@seetheforestthroughthetrees Жыл бұрын
Thanks for watching and your thoughts. 2.875% is really cheap money. Right now, even FDIC insured HYSA and CD's are paying significantly more. Have you considered that in the equation? I have recently built 5 Year Treasury ladders for clients yielding almost 4.75%. The ability to pay off the mortgage, and actually doing it are two different ideas. All of what you said makes perfect sense, and everyone's situation is different, but that long-term money you have is really valuable...
@charlesbyrneShowComments4all Жыл бұрын
@@seetheforestthroughthetrees We have a high yield money market fund which we keep most of our cash in. It's earning 4% bringing in a little over $250 per month. Also 8% of our assets in some CDs of varying maturities @ 5%, 4.75% & 4.25% and we have just started a T-Bill ladder, but we just started so it's currently short term with nothing over 4 months. So we're in the realm of 300-400 per month of taxable interest. We're in the 22% bracket so that shaves down the earnings to just above $300 after taxes. Our mortgage interest last month was $425 so it is close to a wash when compared to our cash investments. With inflation above 6% it further erodes our short term cash investments. Our mutual funds and ETFs are yielding 8%. We already maxed out our Roths for the year I have a 457 plan at work that I am contributing but the plans options don't have matching and my wife's 403b finally has a Roth option and better investment alternatives than the past which was insurance investments and low yield annuities. So we are going to put more retirement into her plan since mine has lower returns and higher fees. So with all taxable brokerage, cash, 529 and retirement accounts we are yielding 8% even after the current market swings. We also both will have decent pensions as well. Our mortgage is equivalent to 35% of our assets. We don't like that debt ratio and I'm in my 50s so that is why we're paying it off a little early, but like I said we are also trying to invest to get our 400K investment nest egg a little larger and reduce our debt before retiring. And paying a little extra on the mortgage is part of the equation.
@seetheforestthroughthetrees Жыл бұрын
Wow! Thanks for sharing. Another thing to think about is that when there is inflation, low-interest mortgage debt gets deflated. The assets generally rise, the mortgage balance declines and your income generally rises, allowing more ease to pay off the debt. Sounds like you are on a great path. Remember, also the interest you earn also earns interest so it compounds. Over a 20-30 year mortgage at these interest rates that can be powerful. Balanced Strategy. Everything in moderation. If you haven't already, you are at a perfect age to check out my video series, How to Create a 100% Tax-Free Retirement Income. Cheers and Thanks for the Sub!
@KudaFamily 2 жыл бұрын
This is really clearly outlined.
@seetheforestthroughthetrees 2 жыл бұрын
Adam thanks for watching! What financial planning topic would you like to learn more about? Maybe I can make a video about it.
@apollo_1238 2 жыл бұрын
Mortgage interest is front loaded. Month to month interest payment is over 100%. Most people move in 7-10 years and have to restart the cycle with a new loan. It’s a great hustle by the bank.
@seetheforestthroughthetrees 2 жыл бұрын
@apollo_1 Very astute. Thanks for watching and leaving the comment. The 7 year itch is a real thing and amortization works to the benefit those who can remain in the same loan for decades. So for those who are moving quite often, they are always in the higher interest paying portion of the loan. That's great to point out and if all you are doing is keeping money in the bank earning pennies, you should 100% pay down a loan faster. Banks charge interest on the loan balance every day, you just pay the interest monthly. The faster you can pay down the loan balance, the lower your total interest payments. The real question is what is the opportunity cost? What would you have done with those dollars? As you know, when you get inflation, like we have now, borrowing in today's dollars and repaying the debt in the future with devauled dollars favors the borrower. If you are a dollar bear and a crypto bull, borrowing in dollars and paying back slowly may make sense. Check out my other video on whether you should borrow to invest for more thoughts on the subject. Cheers!
@astoriacontroller1138 2 жыл бұрын
Thank you so much for the video .. I got a question I have a mortgage since 2016 currently 199K outstanding and paying £1470 a month the term of the mortgage is 18 years would shorten the term be efficient and hence use cash for another property?
@seetheforestthroughthetrees 2 жыл бұрын
@Astoria- thanks so much for watching. I don't provide personal advice on this channel. You would want to review with your current tax and financial advisors. In general for educational content, when you shorten the term, you increase the "required" payment. In many cases you can get the same or similar benefit by just paying more toward principal on the current loan if interest rates are similar. I am a big fan of flexibility and putting a requirement to pay more isn't necessary when you can just choose to pay more and have 100% of those funds to go principal. That way you maintain flexibility to pay less if unforseen events like a job loss or medical issue cause cash flow strain. I hope that helps. Also, the higher the equity in the property the greater the risk for lawsuit so make sure the property is properly titled or insured.
@josephv885 2 жыл бұрын
Hello, I have a question. I have a mortgage since 2016. If I pay off my mortgage ( 185k outstanding) in three years and rent this property and buy a 4 bedroom home for living. Is it a good idea? Thanks
@seetheforestthroughthetrees 2 жыл бұрын
Joseph- That is a great question and one a lot of people have. While I cannot provide personal financial advice in the comment section I can provide education. Owning a fully paid for rental property that has nice cash flow and living in another home is a fine strategy. You could even rent out the other three rooms of the new property (although your spouse may not approve ;). A fully paid for property could also be refinanced to provide the down payment for an additional property. Of course, there are risks with every decision and this should not be construed as personal advice. One question for you, why not let a renter pay down that first property over time and use your own cash in other productive ways?
@JimmyHFinancial 2 жыл бұрын
It really all depends on the situation of the individual. Its a balancing act...
@seetheforestthroughthetrees 2 жыл бұрын
Thanks for watching @ask jimmy! You are spot on. That's why IMO, being flexibile to your annual tax and income situation is very important. Every situation is different, which is why having a financial coach can help guide you in the right direction.
@Ezunit1991 2 жыл бұрын
People talk about math and forget about psychology.
@seetheforestthroughthetrees 2 жыл бұрын
Robert- you are spot on. Financial planning is about more than numbers, it is about peace of mind. But, if you can get both then that is 💯! But, I also aim to challenge conventional thinking, so exploring all the angles makes a lot of sense to me, then people can choose the one that makes the most sense for their situation. Thanks for watching. As I prepare more videos, is there a specific topic you would like to hear more about?
@Ezunit1991 2 жыл бұрын
@@seetheforestthroughthetrees yes, something the financial world seemly likes to ignore. How are financial planners and bankers preparing for the changing financial landscape? As crypto currency’s raise, how is the financial centers adapting new technology? We have seen box stores refuse to get on board with online shopping and fail as a consequence. How are you and people in your space changing with new technology to avoid the same fate?
@seetheforestthroughthetrees 2 жыл бұрын
Great question. Because of immense regulation the financial services industry always moves slowly. I think there are clearly two advisory bases emerging, one that embraces crypto and one that doesn't. I am always a believer that concentration creates wealth and diversification maintains and grows wealth. Crypto can be a nice addition to a portfolio and provide diversification and may change the way we do things in ways we currently don't even understand. We don't know what the future holds, who the winners will be or who the losers will be but it will be fun to see how it plays out.
@alcatel3669 2 жыл бұрын
Very informative! Having a video like that on student loans would be great too. TY
@seetheforestthroughthetrees 2 жыл бұрын
Great suggestion! Glad the video was helpful.
@seetheforestthroughthetrees 2 жыл бұрын
What is your biggest question about student loan paydown?
@alcatel3669 2 жыл бұрын
@@seetheforestthroughthetrees Paying down student loans first before investing? Time in the market, they say. But 7% interest rates (or worse) on student loans make you think twice about investing before paying those down. But then the USD is inflating faster than blow up dolls at an adult toy convention. Any thoughts?
@seetheforestthroughthetrees 2 жыл бұрын
Great comment @alca tel! Student Loans are generally some of the most efficient debt you can get. If you are a dollar bear and a crypto bull then paying back borrowed dollars as slowly as possible with devauled dollars may make sense. Of course every situation is different. It really comes down to opportunity costs. What would you do otherwise with the money you would use to pay down the student debt faster? If it would yield less than the loan over the life of the loan then maybe accelerated payments make sense. Another strategy would be that since the student loan was an investment in yourself, that a portion of every raise could be used to payback the loans. Check out my video on whether you should borrow to invest for more information on the topic. Cheers!
@GODLEYSHOTZ 2 жыл бұрын
Very little people itemize deductions nowadays. We will see if that changes with the Build back plan under Biden, but currently very few people can take advantage of the tax benefit.
@seetheforestthroughthetrees 2 жыл бұрын
@godleyshotz, you are spot on. Thanks for watching and leaving your comment. The Tax Foundation estimates that in 2019 13.7% of taxpayers itemized. Definitely not the majority, but not insignificant either. Typically the people who can take advantage are those with a large amount of medical expenses or are very charitably inclined. If you have $10k of mortgage interest, $10k of state taxes and tithe 10% of your income and say that is $10k then itemizing is a better alternative. It is a benefit that only applies to some but is still an available benefit.
@GODLEYSHOTZ 2 жыл бұрын
@@seetheforestthroughthetrees just make mortgage interest a deduction for AGI like student loan interest and we can avoid this all haha. A man can dream
@seetheforestthroughthetrees 2 жыл бұрын
Someday, we can hope! Meantime, let's maximize the tax code where we can! If you don't mind me asking, are there any financial planning ideas/topics you would love to learn more about?
@GODLEYSHOTZ 2 жыл бұрын
@@seetheforestthroughthetrees I’m more on here for motivational stuff. As a CPA, I’m pretty good with tax stuff. I just like hearing about building wealth or paying off a mortgage for extra motivation.
@seetheforestthroughthetrees 2 жыл бұрын
Great! Thanks for watching. Make sure to hit that subscribe button. More planning and investment strategies on the way.
@bluegillmich 2 жыл бұрын
1.Everyone we talk to in life assumes that we got our loan today(at current rates) .I did not , coming out of bankruptcy years ago mine is 7.875% - but my loan is 6 payments(at term) to pay off 2. A co-worker of mine says that when a loan gets near to end, the bank is likely to expedite and Steal your property at that level to resell and maximize their profits( sound off to me, anyhow.. I have the cash to pay it off now, Interest is really Low at this point of the loan ) What are your thoughts on the bank trying to steal your home?
@seetheforestthroughthetrees 2 жыл бұрын
First of all, congrats to you @keeping it real on being this close. That is great financial discipline! I will say that a home with significant equity is definitely a target for lawsuits so being adequately covered via homeowners and an umbrella policy is important to protect assets. I have not heard of banks "stealing homes" when the borrower is current on the payments although a property with more equity is more attractive to all parties than one with little or no equity. So, being current on payments would be important. Does your coworker have an actual example of how that happened?
@bluegillmich 2 жыл бұрын
@@seetheforestthroughthetrees Not the first time i have heard that, NO they never seem to have any real life examples of banks specifically targeting those with home equity..
@beerbrewer7372 2 жыл бұрын
4:20 Why would I want to spend a dollar to save 30 cents? It seems better in my mind not to spend the dollar. To that end I think it would be smart to (1) Get only a 20 year mortgage and (2) Prepay that mortgage to knock it down even more! After the mortgage hit your Roth IRA and 401k to the full amounts allowed by law. But what the hell do I know I have no college and turn a wrench for a living?
@seetheforestthroughthetrees 2 жыл бұрын
@bearbrewer737, you are spot on. Personal finance isn't taught in college or in high school. You are right, never spend a $1 to save 30 cents. Many people go broke "saving" money purchasing consumptive items "on sale" like TVs. Buying appreciating assets like real estate is a different concept though. The major point through the video is that every situation is different and there is no same answer for everyone. This is not specific financial advice but, generally, if you are investing in assets like stocks, or real estate, or crypto, or art, or.... instead of using those funds to pay down a mortgage then you are most likely over time increasing your net worth faster while potentially enjoying the tax benefits of a primary mortgage. But, if you are accumulating cash in savings earning next to nothing and not increasing other assets via inveseting, then paying down a mortgage early can make a lot of sense rather than having the bank make money off you. If you delay investing for 20 years because you are prepaying a mortgage you miss out on all that compounding over time building additional assets. Generally, waiting to invest in a Roth or 401k to the max while you prepay a mortgage with sub 5% tax advantaged interest will not increase your net worth nearly as fast. *Of course there are no guarantees when investing in other assets. Hope this helps with your journey. Thanks so much for your comment and for watching. Cheers!
@beerbrewer7372 2 жыл бұрын
@@seetheforestthroughthetrees Thanks for the reply sir!
@dbradusc1 2 жыл бұрын
Terrible video. Your efficiency metric just describes the length of the loan. Higher/longer is not better. It just means you pay more interest. Also, the first $400-500k of interest is below the standard deduction so tax savings are not real for most people. Where you do have taxes is capital gains on your investment returns.
@seetheforestthroughthetrees 2 жыл бұрын
@Daniel Bradley, thanks for watching. Sorry it wasn't a help for you but I appreciate your thoughts. Loan efficiency provides a way to analyze and compare the amount of cash flow devoted to a loan per the amount borrowed. The more casfh flow you have, the more opportunities you have. Yes, the longer the payback period, the more interest is paid....with devalued dollars. A dollar today is worth more than a dollar in the future.
@GODLEYSHOTZ 2 жыл бұрын
Daniel I agree with most of what you said. Not sure what you mean by the interest being below the standard deduction though. Generally you pool all your itemized deductions together and then compare to your standard. And 100% agree on capital gains. Generally not factored into their formulas, only show unrealized gains and never recognized
@seetheforestthroughthetrees 2 жыл бұрын
According to the Tax Foundation, roughly 13.7% of Americans itemized in 2019. So you are correct, most people don't but some people do itemize and can take advantage of the benefit. Yes, you do have capital gains on investments in taxable accounts but in the current tax law, most Americans don't pay capital gains taxes. If joint taxable income (income after retirement contributions and deductions) is below $80,800k, the capital gains rates are zero. Additionally, earning a 4.5% gross return and paying 15% on every single dollar of gain still nets you more than a current mortgage rate of interest (3.825%). Average 30 year returns in stocks, real estate, and many other assets have historically been higher than that rate. Of course, past performance is no guarantee of future results.
@GODLEYSHOTZ 2 жыл бұрын
@@seetheforestthroughthetrees very true. Really depends on person and fact scenario. For me I have roughly a 5% interest rate on my house. While, I can see higher gains in the market, I would rather live that “debt free life” and get a guaranteed return on my money. Will be interesting to see itemized deductions in the future. I did see some people discussing getting rid of the SALT cap, which would let more people itemize in this high tax states. We shall see. If only mortgage interest was a deduction for AGI haha
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