The age-old debate continues: should you pay off your mortgage early or invest for the future? In this video, we talk through whether the answer to that question has changed considering the higher rates today on "safe money".
Before deciding if you should pay off your mortgage faster it's important to think through the answers to the following:
- Do You Need the Liquidity?
- How do the "Returns" Compare?
- What's Your Life Stage?
- What are the Tax Implications?
- Do You Need Peace of Mind?
For most people, paying off your mortgage is both a mathematical and emotional decision. But it's important to crunch the numbers to see what actually brings peace of mind. If you'd like to talk through the pros and cons please reach out.
Full Transcript:
Erin (00:06):
Ryan, good to see you today. We are tackling the age old question, should I pay off my mortgage early or invest? Let's say someone has a pile of cash sitting in the bank right now. Perhaps they're invested in a money market fund earning 5%. Let's talk through whether those safe returns have changed the conventional wisdom when it comes to paying down your mortgage early. So you say before you pay off your mortgage, you first need to consider whether you need the liquidity.
Ryan (00:32):
Definitely. It's very important because a good example is let's say you have a hundred thousand dollars sitting in your savings account and you've got, maybe you only have $40,000 left on your mortgage. Well, you might want to take that $40,000 of your a hundred thousand in savings and just pay off the mortgage and be done with it if having still $60,000 in your savings account provides you with enough liquidity. On the other hand, let's say you have a hundred thousand dollars left on your mortgage and you only have a hundred thousand in your savings, and you're going to take all of that and pay off the mortgage. Well, now you don't have a mortgage payment, but now you may not have that liquidity that you need when you need it. So you have to think through these different things for sure.
Erin (01:13):
Absolutely. Next, you have to consider how those returns compare. Compare the ROI of a mortgage pay down versus investing in the market and the return on your debt pay down is pretty straightforward. It's going to be whatever your mortgage rate is. But Ryan, I'm wondering how that calculation compares depending on whether you have an 8% mortgage like now or maybe a 3% mortgage.
Ryan (01:35):
Yeah, it definitely changes the ballgame. Over the few last years, we've seen interest rates go up quite a bit, and what's interesting is that many people have locked in on these 30 year mortgages at 3% or less in interest. Well, if you're now getting 4 or 5% on a money market or a CD, I mean that's safe money. So if you have that and your mortgage rate is, let's call it 3%, does it really make sense from a mathematical perspective to pay that off? No, probably not, but like I was talking about earlier in that example, if you've got a mortgage that is maybe a smaller amount and you just want to be done with it and it gives you that psychological comfort that you feel good, you've got the home paid for and you'll still have the liquidity that you need, well, then it could maybe make some sense to go ahead and do that.
Erin (02:28):
And next of course, you need to factor in your life stage. In other words, how long is your time horizon?
Ryan (02:34):
Yeah, so for sure if you're younger, you might be invested more aggressively and over time, hopefully you'll earn rates of returns of a perhaps six, eight, 10%, something like this. And again, if you've locked in at a mortgage, especially a few years ago at those 3% rates, that really makes the argument strong to say It doesn't make a whole lot of sense perhaps to pay off that mortgage. If you've gotten now a mortgage that's a little bit higher, four or five, six, 7%, the higher that interest rate is, the more it's going to make sense to consider maybe paying that offer, paying that down faster than you had planned to otherwise. It depends upon your age, depends upon your situation. Right now when you're planning to retire. All of these different things are important in making this decision.
Erin (03:26):
And you've touched on this already, but it's so important. You need to ask yourself if paying off your mortgage will bring peace of mind. The spreadsheet may say one thing and our heart may say something else.
Ryan (03:37):
Yeah, I always say financial planning, it is one part numbers, it's the objective part that's so important, but there's also feelings involved in how you feel about making certain types of financial decisions. As long as you're not going far off the rails with different decisions based upon that, then it can make sense to go ahead and pay that down faster or just pay that off. Kind of like my example that I gave earlier, you have a hundred thousand dollars in savings, you have $40,000 left in your mortgage. Hey, you want to pay it down, you'll still have enough liquidity. It brings you that peace of mind. Why not go ahead and do it.
Erin (04:16):
Well, Ryan, if somebody would like to crunch the numbers with you and have a conversation with you, because clearly there is no cookie cutter answer to this question, what's the best way to reach you?
Ryan (04:26):
Sure. So can call 714-462-9155 or it can go to the website, which is CravitzFinancial.com. Go to the contact page there, submit a message, and I'll get back to you.
Erin (04:40):
Great, Ryan. Thank you.
Ryan (04:42):
Thank you.