Have some extra cash? Wondering if you should put it toward your mortgage? Join Matt Robison and I this week as we delve into the answer to this FAQ. It’s not as simple as you might think. Why? Because why you shouldn’t is equally as compelling as why you should work to pay down that debt.
By the Numbers
Let’s start with the basics. From a strictly mathematical perspective, it usually doesn’t make sense to put extra cash into your mortgage. Why? Well, start by comparing your mortgage interest rate to the potential return on investments. If your mortgage rate is low (e.g., 3-4%) and you can potentially earn a higher return by investing your money elsewhere (e.g., 5-10% in a high yield savings account or the stock market depending on your timeline), it makes sense to keep your mortgage and invest your extra cash.
Sleep at Night
So we should just stop there, right? If we were robots, sure. But we are human, and humans have emotions which play a significant role in our decision making. If having a mortgage creates anxiety or discomfort for you, paying it off may provide a sense of freedom and autonomy. Some people prefer the peace of mind that comes with owning their home outright, even if the math suggests otherwise.
Maybe you aren’t anxious about your mortgage, which is great, but there is another factor to consider from the human side of decision making. Your financial decisions might be influenced by your upbringing, cultural norms, or peer groups. Sometimes people follow a particular financial path simply because “that’s what you’re supposed to do” or because they’ve seen others do it. If you have a strong belief system with regard to debt, it is a consideration worth noting.
Finally, the decision to pay down your mortgage early could also be motivated by significant life events, like retirement or sending kids to college, which can blend rational and emotional considerations. If you only have 15 years until retirement but refinanced to take advantage of the super low interest rates of 2020/2021 with a 30 year mortgage, you may want to pay that off by the time you retire from the workforce.
Ultimately, you need to consider both the mathematical and emotional aspects of paying down your mortgage and make a decision that aligns with your unique circumstances and goals.
Should I pay down my mortgage? Yes, No, wait, no. Well, that's been another fun-filled action packed episode of financial life planning with Mike Morton and Matt Robison. We are close to this outstanding pipeline for teachers, Mike Morton, who was a financial planner, and me, Matt Robison. I am not a financial planner, but I'm full of lots of questions, Mike? Yes, no, I don't know.Mike:
Somewhere in between, Matt? As we're trying to record this, what is going on with recording software these days? And especially your camera? Why is your camera keep flipping in and out?Matt:
You remember the Choose Your Own Adventure books, right, turn to page 27 if you decide to accept the martians invitation to board their spacecraft, and I've turned to page 27, and our Riverside recording platform is like, no, sorry, you're going to appear like a 1987 virtual reality simulator. It's I'm mostly three or four pixels, and you know, what's really embarrassing is that it isn't an improvement over reality.Mike:
That's right. Go back to page five reading those choose your adventure books. Did you do this to map where you'd like, I'd have fingers and all the pages just in case I didn't like the way it was turning out I could always go back to where I was.Matt:
Right. And then you can self justify it's like, and look, I chose the right path. Amazing. Yeah, that's, by the way, a fun story. Economists do the same thing, right? There's an old joke, if you want to get 10 predictions ask two economists. And so what economists do, listen seriously, next time you're like on MSNBC or Fox, whatever it is, listen to an economist making a prediction, and they're gonna hedge and they're gonna give you like three or four scenarios. And then after the fact that we like, as I said, a couple of months ago, it's no you didn't.Mike:
That's what I love the headlines in the paper. It's like, stock market goes down because and then you just make up whatever happened yesterday, because the market went down and something's happened.Matt:
It's like the weather man, the weather lady. Like what they're very, very good at is telling you here is what just happened, here's why it's raining now. But we can't tell you if it's gonna rain tomorrow. We can tell you like, and by the way, you think that we're just like jibber jiving here, we're not this is very related to the way you want to answer my question, right? Like you actually, you actually have a multiverse of answers,Mike:
A multiverse of answers. Should I pay down my mortgage? And this is a question I get a lot. We're talking about mortgages, and people have different thoughts on should I throw some extra dollars at this or not? Always, always a question. So today, I wanted to present a couple of different ways of thinking about it, and a couple of clients that I have spoken to that have different ways of thinking about it. So hopefully, this will help you answer the question, should you pay down your mortgage?Matt:
Can I suggest that if you at the end of this episode, don't find this helpful. First of all, direct all complaints to Mike Morton. I'm just the humble co-host here. But also, I'd like to suggest that even if you don't find this helpful for the question of should I pay down my mortgage? It's a great strategy. If you don't want to give an answer to your wife about a question. My wife and I are always doing this to each other, we have to make a decision but we don't want to give an answer. The best position to be in is she will try and say what do you think we should do? And then I don't have an answer that I want to commit to so I'll say okay, here are the options. There are three ways to think about this, right? And sometimes it'll still fall for it or she she's going to listen to this it’s like, Oh, I know that trick. But still, sometimes it works. So you got to keep trying to make them go first? Right? All right, three ways to think about this. What's your first?Mike:
First one is by the numbers, what I say is by the numbers, and so this is the non-emotional side, this is straight looking at the logistics, the numbers playing it out. And a lot of times it comes down to having a low borrowing rate, today's mortgage rates are the highest. Let's start there right. Today's mortgage rates just hit the highest they've been in like more than 20 years, you know, over 7% and so that's why there's questions coming up. Now, people have different mortgages if you're lucky enough that you've owned your home for two or three years, you probably refinanced you might have even refinanced a couple of times to take advantage of the falling rates in previous years, they bottomed out around 3%, or even slightly lower. So by the numbers when you're saying if you have a mortgage, it's like 2,3, 4%, right so that's what your borrowing costs are. And you're locked into that which is good news for you. Yeah, you have borrowed $300,000 at 4% mortgage interest rate, and you're locked in. That's why your monthly payments are the same for the next 27 years. You got it three years ago, 30 year mortgage, you're paying the same amount 4% interest, you borrowed $300,000 now, and you still owe $250,000, so the question is, should I pay some of that down? Hey, I got some extra cash, I pay some of that down, you borrowed money at 4% and today, you could get 5% interest rates. We've been talking about that what to do with my cash, you could get five or so the interest rate, so you borrowed a 4% and you can get 5%. Right? So it's a no brainer, don't pay down the mortgage, that way you can think about is, you'd be saving 4% if you pay an extra $1,000, towards your mortgage, you're saving the 4% interest, you could take the same $1,000 and make 5% interest. So it's a no brainer.Matt:
Keep some blocks for every $1,000 bucks in your…Mike:
Exactly. Yeah. Now, caveat, of course, the mortgage is fixed, but the 5% is not, that might go to 6%, hey, that'd be great, it might go back down. That's not guaranteed. But your investments you can get if you invest $1,000, in safe stuff, maybe it's 5%. If you invest it for the long term, we've talked numbers before, you might get 10%, if you put it in the stock market for 20 years. So borrowing costs were very low for you, because you have a 3 or 4% interest. And you can currently make more than that even in super safe stuff. So by the numbers, if you have a low interest mortgage, no, you do not want to pay down your mortgage ahead of time.Matt:
Got it. Alright, so mental model number one is just do what the math says just whatever it's like you've gone to go play some Blackjack, and it's like no hunches, no, nothing. Just do what the table says like you bring the little table in, you hide it under the casinos. Has everything to do with the numbers say interest rate arbitrage.Mike:
Yeah. Now, if you're slightly different, you might be listening to say, well, I just got my house a year ago, and I'm at 5% interest rate, same thing applies, okay. So think of it the same way you borrow in a 5%, your safe investments can still get 5%. So I'd hold the money if you want to invest, you got an extra 20 grand Mike, should I pay down 20 grand towards my mortgage or invest 20 grand for the future? I'd say you can get maybe 7,8, 9 percent return over the years investing in the stock market or a mix of things so you're still better off, you know, investing for the future by the numbers.Matt:
Got it. Alright. Well, I mean, this is an idea that we've talked about related to different topics of like, you just kind of compare interest rates and like how much is it costing you to get some money? How much is it costing you to spend some money? We talked about this in the episode on HELOC switch, as best I understand it is an alien race that's allied with the foreign key and the Klingons. And we've talked about it and I pay down my student loans. Okay, model number one makes sense. Now, here's my question. If the numbers are obvious, why are there two other models? Why don’t we all just do what the math says isn't that it math.Mike:
Because we're not all just like Dr. Spock. And Mr. Spock, right?Matt:
Spock is a different dude than Mr. Spock. Dr. Spock wrote a great book about how to take care of your kids Mr. Spock did not although fun fact that our Nimoy was also a folk musician, so you know, get a lot out of him.Mike:
So we are all completely logical beings Matt, and we just always do things totally rationally. I mean, you know a lot about economists, right? Aren't we totally rational beings?Matt:
But shouldn't you be advising people to behave rationally? Like saying like, like, let's accept what it is not what it should be?Mike:
Well, here's where I've got to help people Matt. Because, yes, it would be great if you were rational, and I could just give you the rational stuff. But when I work with clients, they're human beings. And my goal, as a financial advisor, financial planner, is to help you enjoy your best life. So if Matt, you come to me, and you say, man, this mortgage is just way no, it's like, Man, I can't sleep at night, I borrowed $300,000 It's such a massive number. It's making me like, anxious every time I'm looking at my account statements, I can't sleep at night, I can't look at you and say, Man, I don't care about that. Just pay it, just pay it as you go. You got 28 more years my friend with 28 years of suffering, having that hanging over your head, that would be very bad human advice.Matt:
So alright, so you're, you're basically making the case for why there should be a model two.Mike:
Yes. This is why there is a model two because we are human. So I'll quote, Morgan Housel, who wrote a fantastic book called The Psychology of Money, he's very, very versed in all the numbers, all financial planning, everything and a fantastic writer highly recommend the book, The Psychology of Money, and the quote from there was we own our house without a mortgage, which is the worst financial decision we've ever made, but the best money decision we've ever made. It’s the one thing that gives us a level of independence, and autonomy. Now, if you have a mortgage right now, two or $300,000, then it's weighing on you think about it for a minute, what if you didn't have that? How would you feel and that's what Morgan Housel is, quote is, gives us a level of independence and autonomy to suddenly feel free. Yeah, I can try to pursue this writing career in his case, right. I can try to do that because I don't have a $4,000 payment I have to make every single month. Even if you had the money in the bank, it's still psychologically weighing on you. So many of my clients are in that situation as well. Don't like the mortgage, it's weighing on them makes them anxious. They want more autonomy, flexibility, even though they might have $100,000 in the bank $200,000 in the bank, they would like to use that money to pay off the mortgage to feel more free. And hey, we all are living our unique lives. And if that's you, then yes, that's something that I think is a good idea to explore.Matt:
Can you tell me why you're making me feel better. I attended a college where I majored in economics, I graduated, this is not this is there's humble bragging, and then there's bragging bragging, this is just me bragging, I graduated with distinction in economics, my roommate, my roommate, also went to the same college and we actually decided to become roommates after college, as we were waiting to take our exam to see if we got distinction in economics or not. Okay, so we're living together for two years in Washington, DC after we graduate from college, with degrees in economics together, we're both working in the field of economics, we both have student loans at the time. And this is probably because interest rates were just invented, because a long time ago, interest rates were pretty, I guess, moderate and our student loan repayment rates, like our borrowing rates were low. So it made not a lot of financial and economic sense for me to pay off my student loans. My roommate said, I can arbitrage here. And by the way, he went on to work at the Federal Reserve. So that makes a lot of sense. And he was just like, alright, I'm just gonna bank what money I have leftover from my paycheck month to month when I'm not putting it to like beer and repairing our ridiculous couch, in our post college life. And I am going to pay my monthly payment on my student loan. And I'm going to bank the extra and earn that extra couple of percent. And he felt great about that, because he lived by the numbers. He's a model one guy, I was irrational and I paid down my student loan with my extra earnings, because I just didn't like to be in debt. I just I don't like it. I do not like it. And so for all of my teasing a moment ago, like I am actually that guy, I paid it down.Mike:
Yeah, I love it man, what a great story. And I still have student loans that I'm paying, you know, about 100 bucks a month, something very nominal, because they're very small, I could wipe them out and pay it off but I'm like, nope, I’m just going to keep paying you where you went to college. Isn’t that funny? Man, back in the day, still going.Matt:
Alright, we've gone through two models, we've determined that I think I should be a model one guy. In reality, I'm a model two guy. Why is there a model three? What is model three?Mike:
Yeah, you know, it's interesting, there is a kind of a model three, which is you've grown up in an environment, we've all grown up in certain environments, obviously. But in relation to money, many people come out of their early years, with a relationship to money, and it's kind of ground into those first 20 years of life. However, your home life was when you're growing up. If money was really tight during that, you might feel very anxious about money and bills, you know, if things feel very comfortable, maybe, you know, you're like, oh, yeah, money, you know, you take more risk, you feel very comfortable with money, no problem. So a lot of it's very formative during especially those first 20 years. So part of it is the environment you're in. And so one of my clients recently, I was talking with them, and they said, Oh, I've always I noticed they were paying an extra $500 each month towards their mortgage and the mortgage rate was very low, like 3%. I was like, man, I think you should just hold onto that money, you could invest it and they said, I've always just had the attitude to pay extra towards your mortgage, that's what you do. You know, and so it's like, you just kind of oh, this is the way it goes like this is what my parents did or this is what my friend group has always done and or the podcast I listened to said this is what you should do. It's a that's what you should do and never really looked at the numbers or questioned that and felt good about it. I'm sure you know so I think that's the third models like, Oh, I just do this because this is the way it's done and it’s much better to be proactive. Think about it for yourself and your situation. Think of the numbers think about your emotions, and make a decision that makes sense for you. Are you ready to create your ideal lifestyle? Let's discover what's most important to you and design a plan to have more of that in your life. Go to meet Mike morton.com all one word, meet Mike morton.com.Matt:
All right, I'm going to blow your mind or hoping to blow your mind, or I'm going to lose our entire audience. Alright, there is, among nerds famous theory in political science, which is three models of behavior when it comes to governments. And they actually line up really well with your three models and the classic case on this, by the way, I studied with the guy who came up with this in grad school, the classic case is the Cuban Missile Crisis. And I won't bore people with a lot of historical detail but the the setup is you're trying to understand why the Soviet Union is doing what they do. And you can understand it first as model one, which is you pretend that they're just like a guy who's making rational calculations or a gal and whatever the case may be, it's your model one. Model Two, is more like there's a little bit of a twist, it's more like your model three, model two is that governments are big, they're big bureaucracies. And the way that they proceed is they just have a lot of standard operating procedures, right. And it's the only way to get things done, because you can't have a meeting for every single action so you got to set up some protocols and so you do things because hey, that's just the way we do things. And then model three is there's a negotiation, there are different factions, different voices, and the outcomes, the decisions that are made, are the result of hashing it out, and like different power structures, kind of like fighting within the internal structure. That's a lot like your model two it's the emotional war that goes on inside all of us. So there you go. If people sat with me through that, I just want to tell you that political scientists have a version of this that you can scale up, it makes a ton of sense with what you just subscribe for individual people.Mike:
Wait, are you saying I didn't just invent these three models Matt? Is that what you're trying to tell me? I thought, honestly I thought this was something really new here.Matt:
I was today years old and up to about 10 seconds ago, I thought that you invented these. Darn, did you invent these three models.Mike:
We'll try again next time. Something else next time, there is one more way I did want to bring up thinking about this. And it could be in the context, not another model but kind of another way of thinking about it is in the context of your situation. And what that could be is a lot of people would say retirement, hey, when I retire, I don't want to have a mortgage. So maybe just refinance a couple of years ago, you got 25 years left, but you're going to retire in 15 years and so you're like, in 15 years, I really want to have this paid off, because I want that freedom and autonomy, you know, so I don't need to pay it off today. But I do have some things that line up with other life events and that's another way of looking at it. So you can put extra money towards the mortgage payments, to bring it from 25 years down to you know, it'll be paid off in 15 years and it lines up with your life. And I personally did something like this when we refinanced I went from, we refinanced like two or three times, remember rates like kept coming down, it was like 6%, 5, 4 and we went down from like a 30 year to a 20 year, finally to a 15 year, quite a few years ago. So there were the lineup, like when my kids are all heading out from high school, and finishing high school and heading off to college, our mortgage would end. And that was a good, I was saving money each time when the rates came down refinance, instead of less payment, I actually just went less years to line it up with some life events that made sense for us. And so that's really a nice way of looking at in the context of where you are, and those life events.Matt:
I love that because that's a clever blend of the emotional and the mathematical, it could be, you could be pure, it could be a pure math exercise, right? It could be to sound technical about it, you could just be optimizing around a different set of parameters, right? Or it could be an emotional thing where you're essentially saying, the emotion of this is here's how I want to feel, if I want to simplify, I don't want to have multiple burdens hanging over me. It's interesting to me, because sometimes the pure math analysis that you see in different domains, it makes sense to me from a logical standpoint but it doesn't make sense in the way that you just laid out, which is sometimes it's not just a straightforward dollars and cents calculation. I'll give you an example, for anyone who's ever played poker there has been a big boom of math in poker, it's totally changed the way professional poker players play. And they really calculate odds, expected values, dollars, and they are very precise about it. If something is a 51% of the time, it will make me more money play. Then they tell you make that play. And I disagree with that because the way I've thought about it is it really depends on your circumstances. If you're in a tournament, and you're playing against other players who you think you're generally better than them, you think you're going to outplay them over time, it's like, I don't want to take what's essentially a 51% shot, I don't want to take a coin flip here, I want to play it out over time. Or I might be in the reverse situation, I might just be lucky to be there and it's like, look over time, I'm never gonna get the odds this good. So I might play a 49% play, I might play a 45% play, because that's my best circumstance. So anyway, I just, I think your fourth model is a really good one that it's worth people bearing in mind.Mike:
Yeah and I think you know, it also gets you thinking about the emotions, right? When many people that retirement date is there, and they're like, I want the freedom, autonomy. I want to feel that way, have that emotion. So I want this paid off by then and you could work backwards for the number. So it was a little bit a little bit of both. And yeah, I think it's a great way of seeing if it fits into the context of your life and your planning.Matt:
I'll give you one more hack for anyone who's stuck. But there's bad news upfront about this hack, which is it only works once. OMike:
Oh, like throwing fire like one time?Matt:
I never did that. That was not a rule.Mike:
You still have yours? Oh my gosh, Matt. That's amazing.Matt:
Oh it’s back in poker. It's like when people stand up for poker tables at one time. It's like, wait one time for your whole life like this is this is your one time? Is it like once per hour. So there's a hack. And here's more bad news by telling you about it. I'm going to ruin it for you. But you can use it on other people. Okay, one time, okay. If you and your spouse are having this conversation, or if you know of someone else who's stuck, what you can do is the Frasier Crane trick, okay. For fans of the show, Frasier uses this on the show, and I've used it on people, it really works. What you do is they're trying to decide between two alternatives, should I pay off my mortgage or not for example, and you say, okay, bear with me on this, I'm going to flip a coin and I want you to commit that you're going to do what ever the coin flip says. And you say, heads, you play it off as tails, you don't flip the coin. And before you reveal it, you say, admitted, you were hoping that would be one or the other. And that's a great way of yanking out of yourself what is your emotional state? What is it you really, really want to have happen? But again, once you've done it, it takes quite a mentality to fool yourself more than once into really, really committing to, I'm gonna do whatever the coin says. So it doesn't tend to work more than that one time. But it can be very, very effective if you're really stuck on a major life decision.Mike:
I bet I could do that every episode with you Matt and you'd fall for it every time. Let's do it.Matt:
What about my deep insights into finance? I feel like oh, my gosh, I you know, what's really, really doubly cutting about that is that I know I've just been insulted. I can't quite figure out how.Mike:
Well, while you think about that. Maybe we'll wrap up this episode.Matt:
Let’s wrap up this episode. Oh, my gosh, it's only gonna go downhill from here. Hey, for my co-host, Mike Morton, I'm Matt Robison, I'll see you next time.Mike:
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