Episode Transcript
[00:00:00] Speaker A: There's a lot of stuff out there. Don't believe everything you read on the Internet. And this is a good example of don't believe everything you read on the Internet.
[00:00:07] Speaker B: You definitely don't believe everything you read on the Internet. In fact, when I first read this, I'm like, holy cow, that just doesn't even make sense to me. And I wondered maybe if this person even lives outside the United States where the home buying process and the banking system is a little different because this is just a little crazy.
[00:00:28] Speaker A: Hello and welcome to on youn Block. We're your hosts, Jeff Anklemet and Pam
[00:00:32] Speaker B: Beatty with Waterstone Mortgage, Fox Valley.
[00:00:35] Speaker A: Every episode, we dig into the questions people are actually asking on Reddit, Quora and everywhere in between. And we bring you honest, no fluff answers from people who live and work in the mortgage industry every day. No sugar coating, no sales pitch, just real talk about buying a home, owning one, and navigating everything in between.
We're based right here in the Fox Valley, so along the way we'll keep things grounded in what's happening across northeast Wisconsin. Because real estate isn't one size fits all and where you live matters. At the beginning of every episode, we like to highlight a local small business that's doing great work in our area. Today's small business features Wildflower Landscapers. And it's that time of year in Wisconsin where you have projects that you like to get done. I know them personally from my BNI group. They've done projects for us. They do amazing work. They're right here local. And I'll tell you what, they take the time to really understand what your project is, give you some options, and they'll lay it all out on your computer so you can see what it's going to look like when it's finished, so you know exactly what you're getting. They set you up with a genuine price as opposed to just, just very vague things to, you know, you know how these projects can go. They expand and it gets more and more. And you really want to know what your price point is before you roll into a project. Wildflower Landscapers takes the time to make sure you're comfortable, you know what you're getting, and they do a fantastic job, so highly recommend it.
So let's talk about one of the most evaded topics in home ownership. Should you pay off your mortgage early? If you've been online, you've seen both sides pay it off early, invest the money instead.
Who's right? Today we're pulling real discussions from Reddit and Quora and we're going to break it down. What makes sense financially, what's more about peace of mind and what makes sense for homeowners right here in Northeast Wisconsin?
[00:02:34] Speaker B: How did you successfully pay off your mortgage early and, and what strategy would you recommend?
[00:02:41] Speaker A: So one of the, one of the best ways to pay off your mortgage early is to, and a little bit depends on how you get paid. But if you get paid every two weeks, there's a couple times a year where you get an extra paycheck. And if you take that extra paycheck and don't go to Jamaica with it and instead use it to pay half a payment. If you're used to making like a half a payment every set aside out of every check, when you get that extra check twice a year, you'll make one full payment a year.
[00:03:11] Speaker B: All right, Actual extra payment a year.
[00:03:14] Speaker A: Correct, one full extra payment a year. So when you do that, you can cut a 30 year mortgage down to about 24 and a half years. You'll just buy what is. And the reason it's effective and works is because it's relatively painless. You're taking that extra half a payment out when you got that extra check, right? And so you don't have to strain your budget to come up with extra money every month. You literally can just when you get that extra check, make an extra half a payment, one full payment over the course of a year and cut years off of your 30 year fixed rate mortgage.
[00:03:45] Speaker B: And I've heard with that strategy it doesn't even have to be that fancy. You can pick, I mean if you're a person who doesn't get paid biweekly, some people get paid monthly or semi monthly, so they're never going to have that extra check.
You can just pick one month a year to send in an extra payment. As long as you are making 13 payments throughout the year, you are going to get roughly the same effect on that. So you could use that when you get your tax returns back or if you get a work bonus, Christmas bonus, something like that. It doesn't have to be fancy, just 13 payments a year.
[00:04:18] Speaker A: I paid off mortgages early a number of different ways. One, sold the house, I let someone else pay off the mortgage early. Of course I lost control of the house, but I didn't have to deal with the high mortgage rates anymore. Number two, home equity line of credit draw. I used equity from another house to pay off the mortgage early.
This only made sense as the interest premium on the home equity line of credit was less than the financing transaction costs. Equity draw I used equity from the sale of another house to pay off the mortgage early. Brute force I made tiny extra principal payments every month for one house. I paid an extra 400amonth and let the mortgage go the distance just to see how that's like. It ended up shaving about three years from a 15 year mortgage. That was one slow burn, but until I finally paid it off this year.
Asset Sale I sold some stocks as part of my portfolio rebalancing and used the proceeds to pay off the mortgage early.
Bonus Here's a way that some of my clients have done equity loans. They borrowed against their ample stock portfolio with the wealth management team and their broker to pay off their mortgage early.
Since they were given extremely generous loan rates around 2%, that arrangement totally made sense. As for my recommendation, my personal preference is for the quicker approaches. Just go with whatever way has the lowest interest cost and goes quick. On the other hand, while the brute force approach is painfully slow, it's also the most accessible approach.
[00:05:36] Speaker B: I think this person must be. I'm going to guess an investor owns multiple properties because some of the things that are being suggested aren't going to be available if you just own your single family primary residence.
[00:05:55] Speaker A: Ed says there he's San Jose Bay Area real estate investor.
[00:06:00] Speaker B: Right? Right. I mean some of those things definitely can work if you have multiple properties. The one he mentioned about borrowing against your stock portfolio. Again, that might work if you have a tremendous amount of stocks available to cover that. The brute for might be the slowest, but again, it's still the one that's going to be the easiest for any individual to do. Just takes a little bit of discipline and you are still gonna save a bunch of interest. Some banks and mortgage companies have penalized early payoff within a certain time, sometimes timed at 50% of the life of the loan. I had a mortgage through a credit union that that had no such penalty. In fact, the loan officer recommended a way to early payoff. I split the payment in half and paid this every 15 days starting 15 days after closing. Interest is earned in arrears, which means interest isn't earned on principal that has been paid. That lousy little 15 day payment really adds up.
On top of that it also resulted in an additional full payment per year. The downside is that payment date is not the same as you move along. If there is a penalty involved in doing things this way, then make an additional 1/12 payment every month. This won't save nearly as much Money, but the overpayment won't be eaten up in fees.
Do you have any comments on that, Jeff?
[00:07:36] Speaker A: Well, I do. What they're really talking about is finding a way to make an extra payment every year. And they, you can package that in different ways, 112 extra every 15 days because as you do that through the course of the year, you're going to have that more and more payment will come through. Right. But you're not going to hit your, your primary days. That doesn't always work for everybody. But there are ways, if you think about it, to do it. Making that one payment every year is the way to really save money. Now the other thing he talks about in here is, is prepayment penalties and laws changed back in 2008.
You have to know on the front and if you have some type of prepayment penalty by law now, they can't just hide it in there. And if you're doing a 30 year fixed rate mortgage, it's extremely unlikely that that's going to be the case. You can get into some situations where you have maybe a five year mortgage where the rate's fixed for five years and then after that the rate can change. And then you might get into situations if you're paying it off in the first two or three years because they gave you a way lower rate in the beginning where you can get into some penalties for a period of time.
But it's, it's unusual anymore, at least locally here in Wisconsin, to see those prepayment penalties like there, there was before 2008, before the financial crisis associated with real estate and homeownership.
[00:08:54] Speaker B: Yeah, I think you make a good point, especially here in Northeast Wisconsin.
Financing with prepayment penalties is very, very rare. And you are going to know that before you sign on the dotted line to buy that home. So if you're thinking and planning ahead, you're going to know that you're going to work that into your strategy again. I think the path of least resistance or the easiest way for the average person to pay their loan off early is to make 13 payments a year.
[00:09:24] Speaker A: I agree. And that's really the bottom line of what they're getting at there.
[00:09:26] Speaker B: This one is a little crazy in my opinion.
I have invented ways to pay off your mortgage without using a penny of your own money.
It is based on three concepts.
Buy in January and sell in June or July. In December, January prices are the most depressed. And six times I have been offered a property for payments in these months where I didn't need to qualify for a loan, you get the best price in January and the best interest rate in the first three months of the year.
Buy in the fifth year after a housing peak in my lifetime there has been three housing peaks and all three times after four and a half years the panic sellers subsided. Buying in the fifth year, year after the peak was best. Up legs never last more than 12 and a half years. So buy a rental and sell it 12 to 13 years after you buy it and pay your mortgage off.
Number three, buy properties that are already remodeled in December January rather than properties that are fixer uppers and overpriced in the summer. Properties that are already remodeled are are easier to sell in the summertime.
Jeff, I'm gonna let you take it away on this one.
[00:10:51] Speaker A: Well, it's gonna be a pretty easy answer. I don't know this person and I don't know if they know their backside from anything. So the concepts aren't real. And this is a good example of you can go out and do your research on the Internet and you can find. We all know you can find all kinds of things on the Internet, right?
The factuality associated with these concepts. I could go into why they're not real, but the short answer is there's a lot of stuff out there. Don't believe everything you read on the Internet. And this is a good example of don't believe everything you read on the Internet.
[00:11:33] Speaker B: Definitely don't believe everything you read on the Internet. In fact, when I first read this I'm like holy, holy cow. That just doesn't even make sense to me. And I wondered maybe if this person even lives outside the United States where the home buying process and the banking system is a little different because this is just a little crazy.
What are the best ways to pay off your mortgage faster and save on interest slowly or possibly not at all? Why in the world would you want to. It'll cost you quite a bit more than if you did something something else with that money. Prepaying your mortgage is a lousy investment these days. With interest rates so low, only the middle class dream of paying off their mortgage. Wealthy or advised people never do.
Mortgage money is about the cheapest money you can borrow. Therefore paying it off will only net you 1% or so after factoring taxes, inflation and such.
The Federal Reserve bank of St. Louis estimates that it costs you 11 to 17 cents per dollar if you pay off your house rather than putting the money in a tax deferred retirement fund.
I would just like to note that this comment was made by somebody with a mathematics and economics degree from the university or from Boston University. University. So I think there's a lot, again, a lot of iffy, iffy things in here.
[00:13:05] Speaker A: Well, it depends on the person and what you're doing. My mathematics economics degree came from the University of Wisconsin.
[00:13:11] Speaker B: So yes, it did.
Go ahead.
[00:13:13] Speaker A: Yeah, there you go.
It depends on the interest rate you're at and what you. What the opportunity cost is associated with that money. If you're going to pay your mortgage off early and you only have a 3% mortgage, but you could be investing that money instead of using it to pay off the mortgage, investing it in something that's returning even 4, 5, 6, 7%. And there's. There's better opportunities than that available, then why would you do that? You're able to, you can basically arbitrage the money that is sitting in your mortgage. You can use instead to invest. And it's going to grow faster than what you would save by paying it off early. So that's his, his basic concept here, which is true. And then he gets into other things about factoring in taxes, inflation, and some of those kind of things. You know, you're paying your borrowed money. There's a concept of borrowed money that you're paying money back with later. All right? That money isn't as expensive that you're paying it back with later, all right, because of inflation, you can't buy as much stuff with it, but you only have to pay a dollar back with a dollar regardless of that inflated value. All right? So there's absolutely also an advantage in that.
What he's talking about is legitimate, provided you aren't just taking that money and blowing it someplace else, but you're truly investing it, you know what I mean? In something that's gonna give you a better return than the current rate you have on your mortgage, whatever that rate is.
[00:14:35] Speaker B: Well, and I think that's the key, too. There were times when rates were much lower. There have been times when rates are much higher. So that's a huge factor. And whether or not you want to, to pay this off, I mean, my advice would be, is you probably want to work with a pretty savvy investment financial planner.
[00:14:54] Speaker A: Yeah. Is going to be key there. There's professionals, again, that can help you make a good decision about how you're going at that best way. Don't do it seriously. Instead, put that extra monthly lettuce into the stock market. For example, consider a low fee s and P500 index fund or these days, a Europe fund. Over decades of time, The S&P 500 averages about 10% annually. While your mortgage might be 3 or 6% before the income tax deduction cuts that down to 2 or 4%. Which number is greater? 10 or 3? Put your extra money there. Finally. Okay. While the math isn't smart, I admit that I pay a bit extra every month on my 30 year mortgage. A bit. I round my payment up to the next hundred bucks.
It is an almost meaningless acceleration of a very low rate loan, but it makes me feel good to do it. Also, I pay one month early. For example, I pay my June 1 house payment by May 1. This gives me a cushion in case I run into a rough month with tight cash flow. I can skip a month with no negative impact.
[00:15:50] Speaker B: Interesting.
I think he makes some good points. Again, my suggestion is strongly. My strong suggestion is you need to be working with your financial planner or investment advisor when you're talking about some of these strategies because the basic math does make sense. If you have a lower interest rate and you can put your money into an account that's going to yield you more than your interest rate, maybe that money is better served in that other account.
[00:16:22] Speaker A: Yes.
[00:16:23] Speaker B: Also, there are things to take into consideration such as how close are you to retirement age?
Are you going to be going onto some type of fixed income? Or, or maybe having less monthly bills is better than not. Again, it's just, it's so individualized.
I also like what he says at the end that he rounds his mortgage payment up a little bit. It makes him feel good to do so and every little bit helps. I think those two things are, are very, very accurate.
[00:16:55] Speaker A: Yeah. I. The other thing to keep in mind is, and he, he touches on it here emotionally. It says he makes him feel better.
It's emotional. Right. We all would like to have our house paid off. On the other hand, is it intelligent? And he says as well, it's not necessarily intelligent. But this is what I do. I round up to pay off this loan. The reality is he has a better opportunity, math wise. But you have to balance that emotional as well as that financial piece. And they're two different things. Right. And so at the end of the day, sitting down with a professional, if that's your financial planner, which is probably who it ought to be, they can give you the best advice. And then we are go through different stages of life. To your point, what does your cash flow look like? Is that changing anytime soon? What fits you best in terms of sleeping at night?
[00:17:39] Speaker B: So I risk, risk, risk, reward yeah. Risk, reward and how.
How much risk are you willing to take on?
[00:17:46] Speaker A: Yeah.
[00:17:51] Speaker B: So some final thoughts on paying your mortgage off early or not paying your mortgage off early.
Bottom line, to me, it again, very much depends on the individual, that individual's financial picture. And definitely get with a financial planner who can explain all your options, give you all the pros and cons, and ultimately, in the end, you have to make a decision that you're comfortable with and can help you sleep at night.
[00:18:20] Speaker A: Yeah, no, and that's a really good point. Help you sleep at night because it's.
It's very emotional. Right. It's your home, but it's also, you want to do the best thing for yourself financially, but that doesn't always go exactly together, and you can find a balance there. And your financial planner is going to help you do that.
[00:18:36] Speaker B: So if you have questions about things you've seen online or you're ready to put a plan together to buy your home, please give us a call at Waterstone Mortgage. We would love to help. And if you found today's information valuable, please subscribe. Wherever you get your podcasts.
