Charles McDonald: 0:03

Hello, I'm your host, Mr. Chuck, a retired accountant turned truck driver, I reduce my debt in a relatively short period of time, debt reduction to achieve financial freedom takes commitment, confidence determination. Worried about paying off mortgage, wondering if paying off mortgages to crack action to take. It depends on where in life a person is, and the reasons to pay off the mortgage. So that's what you have to ask yourself, Where in life am I? And what's, why should I pay off my mortgage?

Unknown: 0:43

Let's start by saying your credit

Charles McDonald: 0:47

card debts all paid off your personal loan debts all paid off, your car loans are paid off, you've been working on it for two or three years, you're getting your debt under control. Maybe the only thing you have left is your first mortgage and a line of credit on your home. Let's work on that line of credit first, because that rate can go up and down, and most likely going up, what's going to cost you more money. So you should focus on getting your line of credit paid off first. Now all the reason I use a line of credit was to remodel the home, I didn't use it to buy a car, I didn't use it to pay off debt, I didn't do any of those things. I only use it to make improvements to the home, I paid that off. First, before I looked at my first mortgage suing you have all your debt paid off, you have one mortgage, and you have a mortgage payment, maybe it's 1500 to $2,000 a month, it could be more could be less, and you're at five or 6% rate of interest. If you have a mortgage that's two or 3% fixed, and you've had it for less than five years, you want the don't want to pay that one off, you want to continuing to set aside money to pay it off later. But right now, it's relatively cheap money, because it's such a low rate of interest. If it's a monthly payment that you can make, and it's not killing your budget, then let's keep it. So if that's the only place you were and you're wondering if I should pay off my mortgage, that case probably not also depends on your age, how much money you have saved up for retirement, and how soon you're going to retire. My goal, my personal goal was to be debt free, before I retired, and I achieved that goal about two years before I retired, that really free up a lot of money that I was able to put aside and increase my retirement savings those last two years I work and it was late in life. So it doesn't really help you a whole lot when you do that. But something is better than nothing is what my focus was at that particular point. So let's assume you're between 35 and 45, you have been in your house for eight to 15 years, you're not planning on moving anywhere you like your job, your career, you're doing well. You have a low rate of interest. You don't expect to be laid off, or you're not planning on having any more children, your car's paid off all your other debts paid off. And you're saving up money, you have a significant amount of money in your emergency fund at least six months worth of your monthly expenses. That's six months of mortgage payments, that includes real estate tax homeowner insurance, surance for the car, living expense, gas, food, clothes, all those types of things you may have to pay out you have six months worth or more, more than better. And that's in an account is somewhat liquid. Because we're as we're gonna go on here, if you pay off that mortgage, you have an asset that's worth a lot of money that you can't get to the money fairly easy. And if you do and means you're gonna borrow money in order to do it, so you'll be back in debt. So with all those things, let's go through if you're thinking about paying off If you're more gates, you're in a fairly good position. That's assuming you maxed out your retirement savings. That's through work. If you're self employed, you're maxing out whatever retirement program you set up through your self employment, whether it's a traditional IRA, simple IRA, whatever you might have, you're making the maximum contributions every year, and that doesn't kill your finances to do so. And you're also able to set more aside and invest maybe in the market, and you're gradually increasing that every month, they may be 500 or $1,000 a month. So you're looking like you're in fairly stable, good situation. So let's, why are you worried about paying off your mortgage, there's some pros and cons to paying off the mortgage. So this what we're going to talk about, maybe you're even consider accelerating your payment plan to knock out the mortgage faster. If you do that, make sure you just apply it to principle don't make a extra monthly payment. So if your next payment due is August, don't, and you got the money to pay it, and you got the money to pay September's monthly payment, don't pay September's monthly payment, that's not going to help you because they're gonna apply it when that payment is due not when you make the payment, so it's not going to help you, it's not going to reduce the interest on the loan, you need to apply a lump sum amount of money to the principal. Because if you reduce the principal, that's going to reduce the amount of interest that you're gonna owe them, it's not gone to reduce your monthly payment at all, the only way to get a lower monthly payment would be to refinance the loan. And if you're sitting on a low interest rate loan, you probably don't want to do that. Unless the 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 time and have about the same payment or a maybe even a lesser payment. But there may be reasons you might want to pay off your mortgage. But should you let's consider whether an early mortgage payoff is right for you. The first one is that paying off your mortgage early, let less debt increase your monthly cash flow mount because you have less payments to make. So you're gonna have more money, which you can then pump up your retirement or whatever else, your emergency fund or whatever other savings you may be doing. If you keep the mortgage, if you refinance in the last five years or so he should have a low mortgage rate. In other words, you borrow historically cheap money. Let's try say if you got a house say less than 4% 5% 4%, anything less than that, you have relatively cheap money. So you shouldn't be too much of a hurry to pay off your mortgage, unless you have a good reason to do so. Investing and paying off your mortgage early. By eliminating interest payments, you gain an effect in equivalent risk free return that 4% used to pay the lender is now back 4% And your pocket, okay, you pay it off whatever your interest rate was, you're not Outland that cash anymore. Use, you can keep it if you keep the mortgage, investing the money rather than paying off your mortgage may give you a higher rate of return, especially in tax advantage or tax free accounts. So if you have an IRA or your retirement account, and if you don't have a maxed out, or even if you have a maxed out to your employer's match, you can you may still not have a max out all the way. The amount your yearly contributions. It's a big number, it's like 25 35,000 a year, which becomes tax free so you don't pay any income tax on that. So if you're in a higher rate of income, let's say 200,000 plus a year, you can defer some of that through your retirement plan. So that would be an advantage instead of paying off your mortgage. Now this is assuming that you're using your monthly income I'm, and you're saving it up, and then you're applying it to the principal over a period of time. So instead of saving it and applying it to the mortgage principal, you're putting it into an investment account, where you might get a six or 8%, or even more return on your investment. Don't worry about the math don't think, well, I 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, because there's no guarantee you're gonna get the 8%, there's a guarantee is gonna cost you 5% on the mortgage, but there's no guarantee that you're gonna receive a percent, one year, you might get 8%, you might get 6%, you might get 3%, you might get a negative percent, he might get a more, but there's no guarantee. So don't look at it that way. Don't think my mortgage is X percent, I can get this, I can net the difference. Because that doesn't always work out. So don't even because you're not considering the risk of the investment. Cash flow, if you pay off your mortgage, because your living overhead is lower, you'd be able to tap fewer of your retirement assets to meet monthly expenses. So if you've been pulling money out your retirement, the Mean monthly expenses, you got a one quit doing that, if you would pay off your mortgage, probably you're not in the position to do so. If you are taking money out to pay monthly expenses, your retirement paying off your mortgage is not in this case, your best interest, you need to first stop using your retirement money for your monthly bills, you need to get your personal finances under control first, go forward from there. So you're never taken money out unless you're retired, because you're paying a penalty, and you're losing the opportunity of the what the money would earn you. So it's generally speaking as not a good thing. 3545 age range, you should be putting money in your retirement and leave it there until you retire, you're saving up your nest egg. If you keep the mortgage, a long term fixed rate mortgage is an inflation hedge or the risk of inflation assume entirely by the lender. As the cost of living raises your interest rate stays the same. Over time, the lender receives payments that are less valuable due to inflation. Okay, so again, if you got that low rate of interest, and it's fixed rate is not going up or down, generally up. That's where your line of credit is gone, it could hurt you. You don't want to maybe to pay it off unless it's a high rate of interest, like eight or 9%. But only if all your other debts paid off. And you can afford to do so without killing your budget. And you're not tapping into your retirement money to do so. And you shouldn't be using your emergency fund to pay off your mortgage. Let's say your balance on your mortgage is $30,000. You've been paying on it for 25 years, he got a six and three quarters rate of interest. Don't pull money out of your retirement account to pay it off. That is not a good way to go. At skin it's opportunity lost on that investment. And you got to keep it for your retirement because that's what it was intended for. And that's what it should stay there. So mortgage payoff considerations. Let's talk about taxes. If you itemize the benefits of the mortgage interest deduction would disappear after you get rid of your home loan. So if you're still itemizing your deductions on your income tax return, and if you don't know it, because somebody does it for you, pull out your tax return find Schedule A, see how much you're claiming. If you have no schedule A in your 1040 return, you're probably using the standard deduction because it was raised much higher a few years ago, so your mortgage interest and your real estate taxes has to be a significant amount of money to be an advantage for you to itemize. So unless you're still be able to itemize taxes is reducing your taxes. You pay the banker reduces pan, the government, he don't pay the banker, you pay the government. That's just the way it is least on the federal level, your retirement planning, we're are you and your retirement planning? Have you been investing on a regular basis since you were 20? Since your first job, since you were 2528 years old, and you're building it up, and you got to lease 500,000 or more in retirement, or you're just getting started on your retirement, maybe that extra money should be able to put more into your retirement, which would live by doing that it's a payroll deduction. So you, you're, you have this extra emergency fund built up, you're not planning on being unemployed, or losing your job or anything like that, or changing jobs or changing careers. You have an extra two grand a month that you just keep putting in a savings account. And then every once in a while you put it in the stock market. Why don't you increase what you put into your retirement account by $1,000, and build up that retirement account faster. Because at the age if you're 35 to 45, you're still young enough, where if you build it up faster starting that your current age, it's gonna grow significantly over time. But time, your age now the time you retire at age 65, full retirement age for Social Security is 6667. For the year younger people, maybe you're planning on retiring a little bit early, say at 62. You don't have to draw out your Social Security at 62. You can just wait until you're older until you can get full retirement benefits, understanding how Social Security work, and what you get, what you got, and what you're gonna receive from so security is important. And this long term plan, if you're closer retirement and have nothing saved up, then you should be working on your retirement, maybe slow down what you're paying off your mortgage. Instead of paying it off in the next two years, pay it off over four years and put more into retirement. Try to build that up a little bit better. And what's your interest rate, saying goodbye to your mortgage feel like a major financial accomplishment. But depending on your situation as possible that just assess vacation. No, you have enough money tucked away to pay off your mortgage without officially conducting the transaction. Oftentimes you hear about good debt bad debt, a mortgage typically falls into good debt set scenario. That's because it's generally low interest. When you have a rate that's very low and you have the opportunity there are more you don't have to be in such a rush to pay it down. Remember, investment comes with risk. There's no guarantees. That was a Certified Financial Planner saying that maybe he wants you to invest more because he can make more money off. Preparing for financial setbacks. Having a house without a mortgage be a good thing. Having the lesser debt burden reduces your breakeven for life expenses as the impact would lay off rather adverse financial event that would be less painful. Such an automobile rack and injury, layoff, a recession, whatever reduction of income with no mortgage, you're going to be more comfortable, less worry. And if you have the emergency fund, you can get by a little bit longer, without as many concerns that one option after you pay off your mortgage is to apply for a line of credit or equity line of credit, and have that available based on your income. So maybe they'll loan you based on how much equity you got while you have 100% equity, then that's gonna be based on your monthly income. So you might be able to get a line of credit for 50,000 or 100,000. You have it available, maybe there's a yearly amount you have to pay but that gives you some cash 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 of credit instead of your emergency fund or instead of your investment accounts. The longer you leave the investment accounts there, the better off you're gonna be, the more money you're gonna have. And the more comfortable you retire. meant won't be when you get to that point. That's all the major considerations we need to think about. But you still are not sure on what you should do. Well make a checklist is what that you have as it paid off. As your line of credit almost paid off, I would recommend paying off any line of credit first, or maybe if you have two mortgages pay off the second mortgage First, pay off whichever mortgage has the your higher rate of interest. If it's the first mortgage, when you pay that off, the second mortgage is gonna move up and be the only one there. But if you get another loan, it will have preference on from the creditor standpoint, first consideration if something bad would happen, like you file bankruptcy or something, I'll be back in one moment with my final thoughts are the articles I refer to in my episodes, have a link in my show notes. If you're interested in checking out the software that I personally use to get my dead oh control, it's in my show notes under shop financial, you need to copy and paste the link. And it will take you to the website. Any questions you can just contact me through that particular website. If you value this podcast and I'd like to make a contribution, I had a contribution link in my show notes also, give whatever you feel is appropriate for the information I am providing. I thank everyone for listening to my podcast, paying off your mortgage maybe is not for everybody. And it depends where in life you may be. If you're younger, less than 50 years old, and you've been pretty good at saving for retirement, you have no debt, no car loans, no line of credits, and you only have one mortgage. And it's still a tax advantage for you, meaning you can still itemize and you can still itemize so you're writing off your mortgage interest and you're writing off your real estate taxes, you're making charitable contributions. And maybe you have some work related expenses you can write off. So it's an advantage for you to itemize. And it saves you a couple five grand Oh, and federal income tax every year. And you have significant savings as far as an emergency account. And you're not one of those that go out and buy whatever you want. Whenever you feel like you don't want to buy a new car, or whatever the case, and you can save your money in order to make a major purchase, then maybe keeping the mortgage is a good thing. But if you're 55 with little or no savings, for retirement, little or no is less than 250,000. And you know that your Social Security income is gonna be the majority of your income and it's gonna be to$2,500 a month, I think the average is like 1900 or something. But I'm thinking the average should be closer to 2500. And that's not enough to pay off them pay your monthly bills, then you need to invest more into your retirement savings because you're gonna need that money when you retire to pay your monthly bills. Is there any way you can downsize? Maybe you're in a big home because you have you had three or four children but they're all want to college moved out started don't live you don't need a big home anymore. Maybe should consider downsizing the home, pay off the mortgage. If you have enough equity you can use the cash maybe to buy a smaller home, maybe not less expensive but at least smaller and square footage. And you can make a significant downpayment on it or your mortgage is affordable. That is a consideration you have to think about staying put in a house that you don't no longer need is probably not a good idea. So let's look at everything in your life and find out where what you can do to make your personal finances better. so that when you do retire, it's either your expenses are going to be less, so you can afford it, or you have enough income, or money available to pay those expenses for 20 or 30 years, that's a long time, takes a lot of money. And inflation is gonna make those expenses even more real estate taxes, keep going up, homeowners insurance keeps going up, maintenance on the home remodeling, whatever you're gonna do is gonna cost you more 10 years from today. So you need to plan for those types of things. Even if you're not consider doing them. But that needs to be something that is in consideration, should you downsize the home, and maybe get a small mortgage that you can afford, or maybe you want to move to a different part of the country, for whatever reason, whether taxes, family moved to a different area, whatever the case, you shouldn't wonder if it's a good thing or a bad thing, paying off your debt is always a good thing, it's gonna free up the monthly income for you, the income coming in is, is you gotta have more available to pay your living expenses, then you have more available to satisfy. For your emergency fund, you have more available to invest in your retirement, you have more available help your children down the road at all depends on what your goals are. Maybe you want to downsize that home, so you can buy a second home someplace, maybe you want to travel more, maybe you want to buy a small yacht to live on. So you can live on it in the wintertime and be war torn, and then be poor. It's cool in the summertime, it all depends on what you want to do. So the only thing you have to look at in the making this consideration is how much you have in retirement. Do you have enough? Or do you need more? I would do that. First of all the other debt paid off, do that first. What's your interest rate? Do I have a tax advantage still on my federal income tax? If not, maybe what's your interest rate, even with a low interest rate with no tax advantage, it's still a good thing to keep that if you don't have a tax advantage, you have a long time left on your mortgage same 25 plus years, 20 years or more, and you have an interest rate above 5%. He should consider at least reducing some of the principal on that mortgage. Even if you don't finance today. If you pay down the principal over the next two years, one to two years. When you go to Finance you'll have more equity. You can borrow less money for a shorter period of time at a monthly payment that's not going to kill your budget and you'll be debt free sooner rather than later. Which is always a good thing.