Why Paying Off Your Mortgage Is A HUGE Mistake – Episode 508  

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[00:01] Welcome to the Prosperity Podcast. Prosperity thinkers, welcome to the podcast. We’re going to be talking about mortgages and why you should not pay off your mortgage early. We’re going to see what Kim’s take is on that. And there’s a little cliffhanger, a surprise, because some of us end up changing the way we look at this over time. Yes, I remember so well when I first started helping people with their personal finances. And of course, you always want to practice on your parents. And I came from a bank where 15 year mortgages were promoted and everybody at the bank said, Oh, you should pay off your mortgage early or do a 15 year mortgage because then there will be less interest. And I just want to pause and say that is an accurate statement.

[00:56] It’s also just a fun fact. Like the less interest amount has nothing to do with anything. What happens to us human beings is we equate that with less cost. And that’s not accurate. But let me get back to the story. So I helped my parents get onto this prepay structure that they paid a fee for to essentially do what they could have done on their own, but I didn’t realize that. And they got on this prepayment route of adding extra principal to their mortgage. And you know, there’s a bunch of different ways to do it. People talk about 13 payments in a year because of the way your paychecks come. They talk about two payments in a month again, because the way your paychecks come, they talk about using like a line of credit and all these special gyrations of dates

[01:48] and interest amounts and paying this and paying that. It all boils down to the same thing, which is essentially operating like a 15 year mortgage or some people even get a 15 year mortgage and do the same thing and try to prepay that or use their line of credit to make it happen more. Well, five years into the work of helping people with their personal finances, I met Todd Langford and we were not married at the time. And he proved to me numerically that prepaying your mortgage is not a good idea, that how much interest you pay is just a fun fact, that you have to incorporate things like the time value of money, which we just did a podcast on. So if you’re curious about that, pop back one episode and grab that and that when you

[02:41] also looked at opportunity cost, which Spencer, we should make a note to do a whole other episode on opportunity cost, that the best mortgage is a 30 year mortgage, fixed Ideally, fixed interest rate paid over time and then refi until you die. Now, I had to go back to my parents. By the way, it took me about two years to change my thinking. It took me a long time to unlearn what I had learned. Had to go back to my parents, say I had made a mistake, get them. Thankfully, it was fairly easy to unwind to stop prepaying their mortgage. And I also had to learn that refi until you die is only for the amount of the mortgage, not taking cash out. Now, there are definitely some times when taking cash out, in other words, getting

[03:50] Same home, but a bigger mortgage on it again is a great strategy and can get you a business or an investment deal or whatever. But as a general rule of thumb, what you want to do is I’ll just put some numbers on it for easier example. Let’s say you buy a seven hundred thousand dollar home and it’s a half a million dollar mortgage. Ten years go by, you’ve paid it down to four hundred thousand. You want to refinance the four hundred thousand of debt for another 30 years. Ten more years go by. You’ve paid it down to three hundred thousand. I’m just using round numbers. Now you want to refinance that three hundred thousand for another 30 years, stretching out what’s called the amortization schedule, which is the

[04:33] time frame, the 30 years in this example of that debt. Just keep paying the minimum payment, minimum payment for 30 years. Refinance minimum payment for another 30 years. Refinance and on and on and on you go. You know, why do people not do that? What is it that’s holding them back? I believe it’s because a home is not just a house. A home has massive emotional connection to it. And so we look at this massive debt. We become fearful and like all decisions made in fear, they’re not usually very good. I know people that have been prepaying their five percent mortgage because the debt is so big and letting an 18 percent credit card run and the balance not get paid off because the debt was so small.

[05:36] So it’s emotion and it’s just lack of stepping back and seeing that big picture. Yeah, you know, I I’ll use the name. It doesn’t matter. I don’t agree with Dave Ramsey for most of the things that he says. I will say 15 years ago, 20 years ago in the car when podcasts didn’t exist. And that was the few of your financial episodes you could listen to or call radio shows. I enjoyed listening to some of those. And he has a few principles that are important. Meaning going after the right debts or being responsible with your money. But you can also be wrong on many things that can penalize people. So if we can take this piece of paint off the mortgage early, would you mind touching on what happens when you’ve sunk all of your money

[06:34] into your house and now you need money for an opportunity? Yeah, this goes back to my ability to change. And so being a change agent myself and really desiring change and helping people change, etc. You cannot change many times if you have heavily prepaid or paid off a home because it requires a bank to say, OK, you’re building an asset there called home equity that is not yours. I know it shows up on the balance sheet, but we should take a lesson from the accredited investor definition. An accredited investor does not get to include the value of their primary residence in the calculation. And it’s a million dollar net worth, by the way, or two to three hundred thousand of income, depending if you’re married.

[07:24] That million dollars cannot include your primary residence. That should tell you something about home equity. And it is so sad to me when people get so stuck in a residential property that now may no longer be a home. It is truly just a house. And yet they cannot move because they cannot get money refinanced or new mortgage or whatever it is because their situation has changed. They don’t have the income to qualify. And the bank is saying no. Jimmy Vreeland, who’s the co-author of our busting real estate investing lies book, says you can’t eat equity. It’s a great sense. That is great. So let’s now take this position that you’ve put yourself into a situation. If you’re trying to pay off your mortgage, if you’ve got a lot of equity

[08:17] in your house, you’re you’re still living in it. You can’t utilize it. What is the different approach? What’s the prosperity approach to this as a change agent? This person is looking at it appropriately. What are you going to do? So I always have people do 30 year mortgages, and it’s not always the right time to refinance. But if it is, and you’re either you’ve prepaid a lot or you’re ten years into a 30 year mortgage, let’s get a new 30 year mortgage. Not necessarily with cashing out, as already stated. You should just refinance the debt that’s there. Additionally, it’s so, so important if you are prepaying to take the money that you are adding to the principal, the extra money that you’re adding

[09:00] to the principal and redirect those dollars. And truly, the best place to do that is into paid up addition of life insurance. Whole life insurance has a premium which builds cash value, but it also has a paid up addition where you can add extra money. And the reason that I specify the differential of making the extra mortgage payments go into the paid up addition is that that’s optional. And this is one of the challenges about not being able to change. If you get yourself stuck in a 15 year mortgage where you’re into that higher payment, regardless, you cannot change that. Whereas if you have a 30 year mortgage and you’ve got extra money, then you can change where that goes and you can be so much more efficient

[09:45] in building an asset that is not going to be taxed, which is, I think, another thing people get into the idea of, oh, my gosh, if I build this equity thing, I’m not taxed on the growth of my equity. That’s accurate. Well, life insurance, you’re not taxed on the growth of either. And you will absolutely positively have the money. And so whereas equity, as we know, can go down, you can have a line item on your balance sheet that shows equity worth half a million dollars. In the next year, it might only be three hundred thousand dollars. Life insurance cash value cannot go down ever. And so, well, you know, assuming you’re not barring against it, never paying back. But you have a guaranteed increase in that cash value.

[10:25] And so that’s an important thing for that. Such precious dollars. And here’s the challenge. You can’t really do other investments with it because it’s five hundred a month or two hundred a month or a thousand a month. Right. It’s not anything you can get into any decent investment with. But you sure can contribute to paid up additions of life insurance with it. Find the premium dollars from another source. And then if 15 years down the road, your peace of mind is just so stuck because you want that mortgage paid off so badly. Well, then you could actually withdraw against not borrow against. Let me correct even my own language. You could withdraw from the cash value and pay off the loan called a mortgage.

[11:17] You wouldn’t want to borrow against it because that’s just creating another loan. And you said to me, my peace of mind is so important. I must get this home paid off. I can argue that financially 10 ways to Sunday. But it’s not going to matter if your emotion is driving you to want to get that paid off. Absolutely. For the people that that tend to be and I’m just going to use the word stock, meaning that they feel like they have to pay off the mortgage because of whatever the situation, their beliefs are for those people. That’s a difficult hurdle. Do you find that there’s a correlation that they also don’t understand time value of money, which we’ve talked about in previous episodes? Yes, I think that’s accurate.

[12:02] It is very difficult for us human beings to understand time period. I mean, you just we don’t do a good job of looking out over our lives over the next 30 years. We might be decent at looking backwards. And so sometimes that can help somebody. And I work very hard to have material that can help educate somebody over this hurdle. You know, maybe they learn by reading or listening or watching or whatever. We have material on all of that. And I’ve absolutely had some people say, yep, I was prepaid my mortgage and I heard your podcast or I read your book and now I’m not. And, you know, that’s awesome. And I’m also super grateful when I hear that. But I do think that sometimes you just have to acknowledge

[12:45] that it’s an emotional decision and maybe they’ll have the ability to change. And if not, then let’s deal with the facts at hand and their emotion and get them still as efficient as possible in the most control as possible and maybe over time, they will be able to change. Yeah, that’s really well said. You know, for me personally, I, you know, I own real estate, some real estate that’s, you know, completely paid off. And it’s awesome because I can say that. And that’s about where it stops. You know, there’s there’s not a ton of utility to it, but, you know, it’s also from owning it for decades. And that’s the reason why. If it’s something that was starting today and tomorrow. No, just doesn’t make sense.

[13:38] The biggest thing for me as a participant in this conversation as a listener is that I lose out on my opportunity because I believe so heavily in myself. I know that I can create additional opportunities. And if I am robbing myself of those opportunities by putting it into a tool that I can’t use, then that’s hurting my family. That’s something that I don’t want to do. Well said. Yes, it just takes stepping back. Being objective, getting clear on a friend of mine uses this terminology, what your objective is and then what the method is that you want to use to get to that objective. And so if a paid off home at some point in the future is absolutely your objective and you’re not going to get talked out of it,

[14:31] then go about it in the most control oriented method that you can, which is building up that side fund in life insurance, cash value or anywhere else that you are comfortable. And then just clearing the mortgage all at one fell swoop. And as we’re wrapping up here, I do want to throw out that our goal is, like I said, keep refinancing, refinance, refinance, and then at some point do a reverse mortgage, thereby again freeing up that equity. That is so well strategically placed. Love it. That’s great. Kim, thank you for sharing this wisdom on the podcast. For any of you listeners, this may be one of those episodes where you have to listen to again to really understand because it’s contrary to many beliefs

[15:25] that all of us have heard since we were little kids. But once you get it, it is amazing. So thank you, Kim. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit ProsperityThinkers.com.