This One's On The House

Welcome to Mr. Stillman's opus about something that would John for a while here in the John you know it really is interesting at Rosewood wealth management. There are a lot of questions are coming from folks who are really baffled about whether they should go ahead and accelerate the payments on their house get it paid off early or whether that's a bad idea and a lot of people kind of confused about that. What you think is a good idea or bad idea to pay off your house early so usually people are approaching this from one of the couple different ways you want. It's a question of okay will should I start paying extra on the mortgage to get it paid off or you know maybe I just inherited some money and I could really pay down the house pay off the mortgage completely or partially pay it down, summoning my principal balance way down and is that a good idea or not.

So usually the guidance I give people is based on how long they're going to be in the house so if you're going to be moving in the next few years and you already pretty much know yet this is not my forever house. Sometimes it makes sense not to go ahead and pay it off because if you're going to pay down or pay off all you're doing is trapping equity in the house and yesterday to get that equity write back when you sell the house in a couple years, but depending on what your next move is. You might be better off to have that money that you paid into the house might be better off for that to be liquid into sitting in cash so that maybe if you need to make the down payment on your next place before you sell your current place that would help you out some. From experience I can tell you that paying extra on the house is not always the best thing so my first house was in Hillsboro and I bought that when I was single we got married. Molly moves in and was crowded but not too crowded and we had Lily and now suddenly it was very crowded and was clearly not the house we are going to be staying in forever love when I was single and probably in the early years of our marriage I paid a little extra on the mortgage each month. Not a huge amount maybe hundred and $5200 extra that I'd pay down the mortgage every month. Well we listed that house for sale.

We moved to Durham, we wanted to move before the Hillsboro house actually sold, so I scrounged up every penny I could come up with to get the down payment for the Durham house thinking all right well will buy the Durham house and then the Hillsboro house will sell and I'll replenish all that money that I just scrounged up when we sell Hillsboro house and I get my money back okay will guess what the Hillsboro house took eight months to sell.

So I had eight months of having two mortgages and I had very little in savings because I put so much into the down payment on the new house right and I was really wish I wish I could have sold my equity out of Hillsboro house without having sell because the sales taken forever and I wasn't cut the price too much just to get it sold. So that was a doubt year was a tough year just in terms of household finances because I had so much money trapped in the Hillsboro house you find that you wish you would say saloon. Some of that money in cash.

If you had paid extra yellow payments leading up to, in retrospect, I at the time that I was paying extra on I was even married yet so it's not like I could've no right while be moved in a couple years with a wife and a our first kid and I'm the wish I had that much like obviously I did know the time but now, in retrospect, is that you know what I would've been better off to save that money somewhere else now. Another reason you might not want to pay extra on the mortgage is if you're not actually going to get it paid off in the foreseeable future.

So let's say you owe $200,000 and you come into $75,000 and you say all right like to pay this down. My balance will be down to hundred and 25,000 what you still have a lot of payments to go before you pay off the house and what you deftly don't want to do is pay all that money in the house without refinancing because now your monthly payment hasn't changed. Yes, you pay down the principal balance. But if you didn't refinance you still have the same mortgage payment. He had before. So you've parted with a lot of cash, but you haven't changed your monthly cash flow situation so that usually is not in your best interest right let's talk about sometimes. Were you would want to pay the house off. Okay, let's suppose that you have seven years left on the mortgage and you're gonna retire in five years. Now if we get the house paid off two years early so it's paid off at the same time that you retire now. This is beneficial to us because now we don't need that mortgage payment as part of your retirement income that allows us to do tax planning for your retirement income in such a way that we can have a lower tax bracket because you you just don't need as much income because you don't have a mortgage payment that's actually helpful because you actually got it paid off and the payment went away. If we were just paying down the balance, but we still the same payment that would've helped us. But if we can look out down the road very well if we just make our minimum payments in seven more years, but I could pay a few hundred extra weathers every month. Or maybe you just pay a little extra every quarter or something like that. This is actually helpful thing to do now. I'll give you one more solution that for a lot of people has made some sense. Some people say you know what I would rather just not pay the house off ever but have a payment as low as possible so as an example, I have some clients who they'd had the same mortgage for years. When they first got that mortgage that he was probably $150,000. Okay this was years ago and they now pay the house down to where they have only $50,000 owed, but they were still paying like $1100 a month because their payment was based on back when it was a bigger balance right right well, now they're retired and life circumstances have changed in such a way that making that $1100 payment for them was pretty challenging but they also work within striking distance of paying it off. It's not like well if we can just endure the $1100 payment for a couple more years then will be clear.

This nominee still had several more years at 1100 a month. What we ended up doing their situation was taking a mortgage that they only had to pay eight more years on and they refinance this. This seems so counterintuitive, but hear me out. They refinanced to a 30 year mortgage okay so let's think about exposition on this. Think about what that did. They were doing a 30 mortgage now a $50,000 mortgage balance. So now there monthly payment is like $285.

While so yet are never getting the house paid off, but also who cares because it's now such a meaningless monthly payment to them. It's not a big deal that they might have appeared on now if they were to come into some money later. Maybe if they get some kind of inheritance went when her mom dies, which is possible.

Okay. Will that point. Maybe we go ahead and pay the house off last cool idea. So I would not recommend that for most people, but in a couple situations. It is counterintuitively made sense to extend the term that lower balance and really reduce your monthly payment for guess basically what all this means you have to judge every situation based on its own merits. There is no one size blanket way to cover these things. That's absolutely right, and the thing that drives me absolutely crazy is people in the industry who adopt the mindset of know you should never pay off the house you're always better off to invest that money, because you'll get a better return on that money then you would get by paying the house off, which while that might be true.

There is an intangible value to having a paid for house that we can't quantify with investment returns again just feels good to have it paid off and then as I mentioned earlier if having it paid off allows us to be lower tax bracket in retirement because we don't need as much income. This is really an extra benefit. So don't get sucked into the financial industry talking point about, you should always just invest the money be better off. John what about the people who are much younger and they're not even thinking about retirement, yet they're not thinking of anything in retirement contexts. Visit pay for them to go ahead and pay the house off if they can well again it's going to come down to some of the same ideas are we going to be in that house for a long time, or would we rather have that liquidity to help us move later down the road up if you're not really sure how long your immune house let's say you're 35 and you say I might be in this house 10 more years I can have it paid off in five or six. Should I just do that and then know that I don't have mortgage payment for why will maybe. But if you're not really positive that you're going to be in the house for that long. What you might do is save and invest the money on the side, but specifically earmarked for home payoff. So let's say you owe hundred thousand dollars and you're continuing to make your monthly payments and instead of putting 500,000 extra into the house you actually just invest that on the side and then if you end up moving any say alright well I don't want to put that money to the South. I don't trap the equity in their you have the money on the side to go. Put into your new house down payment on a new place or if you do end up staying in that house. Once you have enough money in this investment account on the side. You can always take that money and pay off the current house but you wouldn't do that until you are actually knocking out the payment altogether right we don't want to go from hundred thousand to 40,000. And then we still have the same monthly payment for extended periods. I would make no sense. So once you have enough saved up on the side than you paid off. That's if you're just not sure how long you're going to be in the house all make sense. So it's never as black-and-white as yet pay off the house as quickly as you can in all situations. It's also not as black-and-white as note never pay off the house quickly you'll get a better return by investing that money. I'm sorry.

It's just not that clear cut. Not that cut and dried while you been listening to Mr. Stillman's opus get in touch with John. Still, if you have any other questions about this kind of thing. Check out the website and Rosewood wealth management.com that's Rosewood wealth management.com Carolina once towards doing business as Rosewood wealth management is a registered investment advisor in the state of North Carolina. The material presented is intended to be general information not be construed by any consumer is the rendering of personalized investment advice