Updated: Nov 28
Many say purchasing your home is one of the biggest decisions you make in your life, but very few talk about how big of a decision it is to pay off your home.
There’s a lot of disagreement on this topic, and clients often find themselves lost and uncertain as to what they should do. Guiding the conversation, our clients will gain a more nuanced understanding of why and why not to consider paying off their mortgage.
This flowchart covers important decision-making factors a client must consider when paying off their mortgage, such as:
Thoroughly weighing the pros and cons involved in this big decision, and how they specifically relate to their financial situation.
Recognizing what degree of flexibility they may or may not have after paying off the mortgage.
Considering any tax implications that may result from paying off the mortgage.
Identifying sound reasons for paying off the mortgage, and determining the best course of action if applicable.
Hi, Todd Pouliot, Gateway Financial, again mygatewaymoney.com.
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Today is a great video I love this flowchart because it doesn't have numbers in it. These are flowchart organization in that we take the logic statement of yes/no, and we usually try to find an endgame to the issue at the matter. But, this flowchart is different because it may send you away from this flowchart. It may send you in different directions, and this is a very big issue that most people do not talk about until the end is near. And, one of those issues that we want to talk about is paying off the mortgage. Should I pay off the mortgage? And, buying a home is one of the biggest decisions of your life, but very few people talk about how big of a decision it is to pay off your home. And, there’s a lot of disagreement on this topic, and we find that our clients feel lost or uncertain about what they should do. And, what we have with this flowchart - it just helps us guide the conversation and it helps our clients gain more of a nuanced understanding of why and why not to consider paying off their mortgage. Again, we're not going to talk about numbers here because I think the numbers aspect of paying off your mortgage is below some of the other issues that we're going to talk about because he has numbers matter, but ultimately in financial planning, one of the things that we see is, we're not just taking a picture. A picture is just a moment in time. What we want to look at is the entire movie of your life and financial planning as we go along allows you to pivot and that's one of the things were going to talk about in this flowchart is some of the pivot points, and that's why this flowchart sends you other directions. And, it's important to cover these four main areas today. So, the four main areas that were going to talk about are weighing the pros and cons involved in this big decision, and how they specifically relate to your financial situation. We want to recognize the degree of flexibility that may or may not have after paying off the mortgage. Consider the tax implications that may result from paying off the mortgage. And, identify sound reasoning for paying off the mortgage and determining the best course of action if it's applicable. So, as we always do, we’re sharing our screen with you to give you the information we have. So again, we’re going to start with that first logic question. Do you have other higher-priority debts? For example, higher interest rates, or relative cash flow burden in addition to your mortgage. If the answer is yes, we want to send you somewhere else. We want to send you away from this flowchart we want to look at the flowchart, “Should I Pay Off My Debts?” And, that is a good topic just to stop on and say listen, I don't like debt in this room, and when we get people and we want to talk on Zoom or we meet face-to-face, we want to look at – “Hey, do you have any debts?” And, most people say no, then I asked them, “Do you have a mortgage?” Do you have this? Do you have this? And, things kind of change. Or, we want to reveal those other debts. I'm not saying mortgage debt is bad. What I want to talk about is, “Do you have other higher-priority debts?” Student loan debts or other – HELOCS, or other things that are out there. And, if so, go to these other flowcharts. Then let's say no. you know we're really focused here. Do you have enough liquid assets to pay your mortgage debt in full? Let's go down this side and say no. If applicable, do you have enough liquid assets to pay down your mortgage enough to eliminate any PMI? First of all, I don't want to see PMI. PMI is just a negative expense that goes right to the bank. They're taking the burden of their bad mistake to offer you a loan that you probably shouldn't have gotten in the first place, and taking that burden and putting it on you. That is a revenue generator for the bank period. That does nothing to help you and your personal financial situation. We want to look at maybe refinancing. And, one of the reasons we want to look at that over the last few years, home rates have accelerated, and you may not be in a position to pay PMI anymore because your debt on that versus what the value of your home is versus your mortgage balance may be vastly different than it was when you originally got the mortgage. So, I don't want to see PMI, and if we do, let's look at how to eliminate that, and can we refinance the mortgage to decrease the payment and lock in a lower interest rate and/or payoff it sooner? If that answer is yes, of course, I'm sending you away again, see another flowchart – “Should I Consider Refinancing My Mortgage?” We’ll look at that flow chart instead of this. If the answer is no, continue saving more and waiting until your available refinance options improve. Okay, so we've gone down this and we sent you away three different times. Let's look at yes, I do have enough liquid assets to pay the mortgage. Will you have an adequate emergency fund after paying down the mortgage? If that answer is no, with an increased cash flow from paying down the mortgage, will you be able to replenish your emergency fund relatively quickly? Hmm, maybe not. Consider keeping your emergency fund, and funding for other short-term goals intact, especially if replenishing them would be a challenge. Again, for us, that 3 years - 1 to 3 years – is short term. So again, we’re just going to come back up and say yes, we do have the emergency fund, we do have the liquid Investments. If applicable, will you have enough money for other important previously earmarked short-term goals? If the answer is no, with an increased cash flow, since you're not paying off that mortgage, will you be able to replenish the funds? If the answer is no, we come back to, “Hey, consider keeping your emergency fund.” If the answer is yes, this is the part I love to talk about because this is about, “Hey, being able to sleep at night.” There is no monetary numeric value on being able to sleep at night. Would paying down your mortgage provide meaningful and compelling benefits to your personal life and financial situation? For example, cash flow increase, guaranteed interest, PMI saved, reduction in stress, and increase in happiness. Boy, how do we put an increase in happiness on a spreadsheet? So difficult. Is that more important to you than the higher potential upside of other investments? “Well you know, 3.5% on my mortgage, and the market returns 10%.” These are not discussions about numbers. These are discussions about happiness and cash flow and other areas of the financial plan. So, be cognizant of this – this is my favorite part of this whole flowchart. Now again, I will tell you from the statistical side what I think, but we need to really concentrate on a human being here for financial planning. That's why this is a human relationship, to let people know what we're talking about with financial planning. So yes. Would paying it down provide you with more compelling benefits? When sourcing the funds to pay down your mortgage, will there be any tax consequences that negatively impact the components of your financial plan? Crossing the AGI or modified AGI threshold, loss of credits or deductions. This is where having tax planning in your financial plan comes into play. Again, look at that. Do you have those sources that negatively impact you – Do the benefits of paying down your mortgage outweigh the cost of any associated tax consequences? What are the tax consequences of pulling your money out of a 401(k), taking all that, and paying the income tax and possibly a penalty? That is something I don't want to see because once those tax dollars are spent, they are gone, they're gone forever and we cannot get those back. So, if so come down here and look at the appropriate other ways. Open a HELOC. Something I did not write here, but I do like a lot, is the security-backed line of credit (SBLOC). They’re so much easier and typically less expensive than a HELOC or reverse mortgage line of credit. So, look at those other assets or other ways to get those monies. And, down on the other side for no, consider paying down your mortgage in part or in full, if it makes sense for your personal and financial goals. If it makes sense. So, be careful with all this flow chart where it goes and what it means. Again, I don't want to say that paying off your mortgage is wrong or that paying off your mortgage is right. Yes, we can run it through the spreadsheet. We can run it through how to get out of debt and figure it out. Sometimes it feels better to sleep at night knowing you've got that title in your hand for the home. Just like paying off a car, once you pay off a car to get the title and you no longer have that car payment, it allows you greater cash flow and that means a lot to people. So, getting out of debt is very important. How you get out of debt is also important. Looking at those tax implications and does it make sense for my cash flow and my short-term goals of 1 to 3 years and also my emergency fund? We really appreciate you coming back and understanding that all of these flow charts are not singular. Sometimes they go out, just peeling away the different layers of the onion and looking at financial planning. We want to know what is all going on with the financial plan and most importantly, it's not a – one decision – one answer and that is the thing that we're going to do. We want to be able to pivot. We want to be able to have the ability, when life changes, to be able to do things with financial planning. So, thanks again so much to our subscribers who come back. Thanks again to those that hit that thumbs-up, really helps us with the YouTube algorithm and we appreciate you ringing that bell and getting notified when we bring you these new videos. And, I hope you all are having a wonderful day. Thanks again, and be well.