Ep. 88 | Mortgage vs. Savings: The Ultimate Debate
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John Tripolsky:Hey, everybody, and welcome back to the podcast episode 88 today. We are gonna dive head first into should I use my savings to pay off or maybe pay down my mortgage or your mortgage unless you're feeling really, really generous and you could pay mine? But in that case, let's stop wasting time and let's jump into it after we hear from our episode sponsor.
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John Tripolsky:Alrighty, everybody. You heard the intro, and the offer still stands. If you're feeling really generous, we have plenty of mortgages that I'm sure you could pay off if you really feel like it. But let's assume you're considering paying off or paying down your own mortgage with your savings, your hard earned savings. We are gonna answer that question for you.
John Tripolsky:So think of it as almost the Shakespeare quote, right, of was it to be or not to be? That is the question. Well, the question today is how do you use your savings? Obviously, for your mortgage. So the best guy we could bring to the table is the bald, brawny, and beautiful, mister Pecuro.
John Tripolsky:How's it going, man?
Chris Picciurro:Oh, I am great, John. How are you doing?
John Tripolsky:Hey. Pretty good, man. Pretty good. This one, I'm excited about this one as always. I know I say that a ton.
John Tripolsky:It's kind of me on repeat as always. But this is a really good topic because, right, some people think that, you know, we won't say all debt is bad debt, but they look at a mortgage as being a huge, you know, liability. It's a monthly bill that they really don't wanna pay. But ironically enough though, right, somebody might have a we'll call it a $800 mortgage, but then they go and buy a car that they're paying more than $800 for, and they're comfortable with that. So I look forward to this one diving into it.
John Tripolsky:You know, the the financial benefits, tax benefits. I know we're gonna digest this and dissect this a little bit. But, honestly, I don't even know the best place to start with it with this topic. So I'm gonna kinda throw it over to you for that one.
Chris Picciurro:Well, it's a great topic, and apologize for my voice being shot. Had attended 5 days straight worth of travel baseball world series play for our youngest. So, but feeling good, John. I was back down in Panama City Beach, Florida, the birthplace of this year podcast. Some memories spewed out.
Chris Picciurro:That's right. Every time
John Tripolsky:I eat pizza, you know, I I think about it. You know what's funny too? Thinking of that podcast. It's almost like the smell of pizza reminds me of our first podcast. Probably because we were literally nose to Mike, all huddled up on a couch on the little cheesy little $10 lavalier mic that hooked up to an iPhone and a pizza box.
John Tripolsky:But Well, it's good being
Chris Picciurro:that we had mouthwash and toothpaste on that trip.
John Tripolsky:And and we're lucky that we like each other. We could, you know, cuddle up on the couch.
Chris Picciurro:So Exactly. Exactly. Well, let's I don't know. I can't even I can't even segue cuddling into this into this. So let's cuddle our finances here, but this is a great topic.
Chris Picciurro:I I kinda feel silly that it took us almost 2 years into this podcast, episode 88, to address it, and I can't even take credit for the topic. Someone in our defeating taxes private Facebook group proposed this topic and and threw it out there for us. And I thought, man, that's a great, great topic. We had a little bit of content on it that people enjoyed. So, yeah, we're in an interesting environment.
Chris Picciurro:Interest rates have climbed quite a bit over the last couple years. And there's people that, that have, through various resources of work and whatever, have have stockpiled some some assets, some cash. When we say cash, we're not talking about necessarily physical dollar bills cash, although it could be. We're talking about money that's real liquid. Okay?
Chris Picciurro:So things liquid means you can access it quickly. So this would be money in your checking account, your money market account, your savings account at your typical credit union or bank or brokerage account. So, you know, we we had this question posed that, hey. If I've got a mortgage let's say, John, let's just say you have a mortgage with a balance of $200,000 and you've you've got $250,000 sitting in your bank account, and you could basically take 200 of that 200 of that 200,000 of that and wipe out your mortgage should you do it. And when really it comes down to it is we've got different factors.
Chris Picciurro:Right? There are financial considerations, and then there are tax considerations. And then there are x factors, I wanna call them, because we like x factors. We all we use that x factor when we talk about how to pick a tax professional. But, but yeah.
Chris Picciurro:So we've got financial considerations and tax considerations. Let's talk first on the financial considerations because the first thing you have to figure is this. It's it's real simple. Take the tax benefit tax part out of it. What rate of return are you getting on that savings versus what is your mortgage interest rate?
Chris Picciurro:So luckily, many people listen to the show and know that my wife and I relocated from Michigan to Franklin, Tennessee about 8 years ago. A couple years after we relocated, we refinanced our home. Luckily, interest rates were at 3% at that point. So our interest rate is super low on our on our property and our main residence and our primary residence, I should say. So So if I'm getting paid 5%, 6% from the bank, credit union, etcetera, does it make sense to take money out of that that account that I'm earning 5, 6% to pay down or pay off a mortgage that I'm only paying 3% interest on?
Chris Picciurro:So you've got to really think about the on the first first financial consideration is think about the interest rate. Right? What are you earning versus what are you paying? Honestly, Chris, I think it's
John Tripolsky:you know, I I I know a bunch of, lenders and real estate agents, so so I, this is me poking fun at them if they ever happen to listen to us. But I think it's kind of interesting that some of them. Yeah, I wouldn't call it part of their pitch. Right. But when you look at an amortization schedule, sometimes they look at it as well, you know, this is what you can afford.
John Tripolsky:And obviously I can't say I know any of them that are too salesy or unethical or anything like that, where they're trying to get you into something you can't afford. But they're always like, hey. If you make double payments, triple payments, you could pay it off so much quicker. So I think us, you know and and my Canadian family always laughs at me because they look at mortgages and and credit card debt and everything completely different, which is very inter when we get together for the holidays, I think it's great. But I think we're ingrained, you know, to when you own a home, the best thing you could do is own your home outright.
John Tripolsky:But a lot of people, you know, maybe strive to that a little too far. And and like you said, they almost overlook, you know, opportunity costs. And and some of these other things I know we're gonna get into. And, I mean, you gave the best example starting there. Right?
John Tripolsky:Is if you're even if you have a 5 or a 6%, you know, a mortgage, we'll call it 55. So even if you're at 55, your average checking account now, you're probably getting right around there or a little bit more. I've seen some of them that are 6 and a half and and up from there. So you're right. I mean, you're basically making a point a half.
John Tripolsky:You know what I mean? You're you're almost getting paid a little for not paying off what you have in debt and not even getting into the tax considerations.
Chris Picciurro:Right. So you hit the one of the the other second of 4 financial considerations is opportunity cost. Opportunity cost is what what are the other things that you could do with that cash? So let's take risk out of it. Right?
Chris Picciurro:Because typically there's a correlation between rate of return and risk, but let's say you have that money sitting in a checking account or savings account earning 4%. Let's say your let's say your interest is 3 a half percent on your mortgage, but you are interested in in a in a bond and that bond is you feel safe and that bond's gonna pay you 8%. Well, even though paying the mortgage off might make sense, your opportunity cost is essentially 8% for the bond, so you wanna look at what are your other options for that money if you didn't pay the your mortgage off. And we we say all the time in our practice, no decision is a decision. We actually we say it in life.
Chris Picciurro:Right? No. Sometimes when you know no decision is a decision. And, you know, I'm sure with you and Stacy, you know, we we poke fun our wives don't watch this or listen to this. They certainly don't watch it.
Chris Picciurro:But, you know, they they we say, well, hey. What do you want for dinner? I don't know. You're driving down the road. How about Mexican?
Chris Picciurro:I don't care what you want. I don't care. And then you say, well, how about alright. Let's get Mexican food. No.
Chris Picciurro:I don't want that. Alright. Well, let's go grab pizza. Your wife says, no. I don't want it.
Chris Picciurro:Wait a sec. So you made a decision that you actually don't want Mexican and you don't want pizza. So in your no decision's a decision. So, but the opportunity cost of the of those bonds, you know, is important. Segwaying into this the 3rd financial consideration is liquidity.
Chris Picciurro:I mentioned liquidity in the very beginning, but liquidity means, do I have access to those funds? So let's say to to take money and pay down a home equity line of credit, which is typically a higher interest rate right now, and you could always draw on that money if you needed it, most likely, that doesn't hurt your liquidity. But if I've got a $100,000 of of saved up in my savings and I have a mortgage of $100,000 and I pay it off, if I need $10,000 due to a financial emergency, I can't rip a shingle off my house. Right? So you don't you you really wanna keep as strive for, in my opinion, 3 to 6 months worth worth of living expenses in your savings account.
Chris Picciurro:And then maybe above that, I'd feel comfortable paying down the mortgage. So liquidity is the 3rd financial consideration. Then the 4th is really mental. It's it's having that debt free mindset. And, John, you mailed it feeling like I, quote, own my house, and I think that was very, very prevalent with, our parents' generation and our grandparents' generation where they wanted that feeling of of, you know, maybe they've had bad experiences with banks.
Chris Picciurro:Maybe they just, you know, quite frankly, maybe they're mature age and they're worried something's going to happen or they're going to forget to pay their mortgage for a few months and they're going to somehow the house is going to get foreclosed and taken from them. So that debt free peace of mind, if it's if that peace of mind is valuable to you and, you know, you're earning 3% at the bank and you're paying a 3% in interest and you can afford to pay that mortgage off, maybe that peace of mind would be would be the the tipping point. And those are the 4 financial considerations.
John Tripolsky:Right. And then, obviously, I mean, there you know, we I think maybe 5 or 6 episodes ago, I was just kinda mentally trying to think about, right, we're talking about interest rates back in the seventies eighties. They were a lot different. I mean, what was it? Maybe eighties, early nineties.
John Tripolsky:I think that they average like 14 and a half percent for your average mortgage or someone on those lines. So obviously if say you're even at 10%. It's very hard to find something that you're making 10% interest on year over year and comfortably. So obviously, the thoughts were different there. Maybe they looked at it and kind of mentally trained themselves and others.
John Tripolsky:You know, from a financial savings standpoint, you don't want a mortgage if you can avoid it.
Chris Picciurro:But that Yes. But oh, go ahead. I'm so yeah. I mean, you you nailed it. In the 8 in 19 eighties, the median mortgage rate was 12.82%.
Chris Picciurro:12.82 is a median, and it ranged from 9.03 to 18.63. That was in the 19 eighties. That's a credit card. That's wild. Exactly.
Chris Picciurro:In the nineties, the median mortgage rate was 7.88. It ranged from about 6 a half percent to 10 2 thirds. So we're still in a lower interest rate environment right now. Right.
John Tripolsky:And then and then, you know, obviously, one thing too. I mean, we we probably won't go into this today because this is more of a of a lending question. Right? But, obviously, there's the lendability factor. Right?
John Tripolsky:Or you're you talked about your DTI, you know, your debt to income. Say you have a $3,000 more $3,000 a month mortgage, and all of a sudden you had a had a life change and you're no longer making 2, 3 100,400,000 a year, you know, obviously that kind of cuts you off at the knees a little bit as far as for buying an investment, etcetera, etcetera. So obviously there's reasons and planning that goes into that.
Chris Picciurro:Absolutely. And and, you know, Brenna Carls from Mortgage Shop does an awesome job talking about DTI or debt to income ratios, and you nail that. It it that's one of my x factors. What are the other non financial ramifications of of paying off your mortgage? We've seen it many times where if a senior citizen wants to, let's say, purchase a home or wants to, you know, or we like to say mature age person, wants to purchase a home or refinance a home.
Chris Picciurro:They might have a significant amount of assets, but those assets are in retirement accounts, which they're gonna pay tax on to take the money out, and they just don't have a lot of income. They might have Social Security, a small a small, pension. So even though they have even though they might have a 1,000,000 and a half dollars in their IRA, they're struggling to qualify for $300,000 mortgage. It sounds crazy, but that's true. So x factor would be, how does it affect your credit and your lendability, your in in your debt, you know, debt debt to service, ratios.
Chris Picciurro:Debt to income, DTI debt to income ratio. So
John Tripolsky:And then, you know, we've done 88 episodes of this and maybe about 30 episodes ago. I think we had somebody on and they they brought a new term to the table for us, and that was situationally dependent. Yes. Situationally the primary. So I think that's very fitting with this one that depending on what you want to do or what your goals are, planning, purpose, etcetera, it is very situationally dependent.
Chris Picciurro:So let's talk situations and we talk about the tax considerations when paying off mortgage or keeping the money in savings, that mortgage interest deduction. So I was talking about, hey. You're earning 3% in your savings account, but you get and you're paying 3% to the bank. What we have to remember is that your mortgage interest is tax deductible if you itemize your deductions. So, John, if you're in the if you're in the to make easy numbers, if you're in the 25% marginal tax rate and you're paying 6% on your mortgage interest, you're really paying 4 a half percent after tax.
Chris Picciurro:So that's something to consider. Right? 20. You're out of the 6% you're paying, you're getting a tax, benefit. You're getting a tax deduction of the entire amount of interest but times that by your marginal tax rate.
Chris Picciurro:What's the but conversely, conversely, excuse me, you're also paying interest on the you're paying income tax on the interest income from the savings account. So just because you're getting paid 5%, let's say you're in the marginal 20% marginal tax rate. Let's say the bank's paying you 5% on your savings account. You're only keeping 4% if you're in the 20% marginal tax bracket bracket. So 20% of your interest would go to uncle Sam.
Chris Picciurro:We're not even talking about state and local tax. So don't just go apples to apples and what percent's higher should I pay it off? Think about the after tax, that's tax flow. Tax flow and cash flow aren't the same things. We know we it's one of our 3 laws.
Chris Picciurro:And factor in the mortgage interest deduction and the marginal tax rate on your interest income.
John Tripolsky:Absolutely. That's a and that's a good one too because I think some people may forget about that too, Just the the the deduction opportunity with those. Exactly. And and so the second, you know, the second of 3 tax considerations
Chris Picciurro:well, well, we already went through one of the the first two. 1, the mortgage interest reduction and the the effect of of that tax deduction on how much interest you're paying after tax. To federal, state, and local income taxes on any type of income you are receiving, excuse me, from your bank, credit union, etcetera, on that interest income or maybe a dividend if it's a it's a if it's a credit union. The the final thing on the tax considerations would be this. If that money's in a brokerage account and you let's say you bought John, you bought, you know, Apple stock for $1,000.
Chris Picciurro:Excuse me. It's worth $200,000 and you sell the Apple stock and pay down your $200,000 mortgage. What are you not factoring in? You're not factoring in the cap the tax on that $199,000 capital gain. So, yes, we said, should you take money out of your savings?
Chris Picciurro:But if you're listening, be wary, be aware of if you're not taking the money out of a savings, checking, or money market account, what are the tax ramifications if you were to sell it at a capital gain? Or if that money is in, like, a pretax kind of like a 401 k or an I or IRA, you might be looking at your statement saying, oh, I've got $200,000 of cash in my IRA. I'm just gonna take that cash and pay my mortgage off. Guess what? It's gonna be taxable when you take it out of that IRA, traditional IRA or 401 k.
Chris Picciurro:Now if it's in a Roth and you can make a qualified distribution, now we don't have to worry about that. So
John Tripolsky:be aware of what type of account the cash or savings is in that you're gonna use to pay the mortgage off. And these are really good too with whatever whatever somebody or whoever somebody's working with a tax pro financial planner, etcetera, right? Like this is it. We'll call it an objective view. But as far as for playing into it, right, like the we'll call them, say you have the taxpayer and the tax pro.
John Tripolsky:So 2 2 players on the same team, different positions. You're looking at it from 2 different sides. 1, say, taxpayer thinks about it as like, wow. I do not want this mortgage. I do not wanna be paying for this every month.
John Tripolsky:I just, you know, laser focused. They don't want it. How can I get rid of it? But like we were just talking about, I think we have at least 5 or 6 really, really good points there that almost make you lean on the other side of the fence, as far as for, you know, if you're comfortable with it, we'll call it the comfortability factor. Then the benefits far outweigh, you know, just getting rid of something, obviously, because, you know, and the, the great thing is, right?
John Tripolsky:I mean, depending on what kind of mortgage you're in, we'll but we'll say 9.999 out of 10 of them. Mhmm. Your rate's not gonna change. You know, it's fixed. So you know what it's gonna be like in 4, 10, 15 years.
Chris Picciurro:That's I mean, you nailed something too good. Yeah. Mostly the rates are fixed unless you have an adjustable rate mortgage or an ARM. One more thing to consider, you just should've added it in the beginning. Some mortgages, especially on investment properties, might have a prepayment penalty.
Chris Picciurro:So you have to factor that in as well. So I could say, personally, we we we paid a prepayment penalty. We sold an investment property once. We did factor that penalty into our profit, and we decided it would show us a good idea, but it was definitely a factor to consider, when you have a prepayment penalty. So, yep, we have so here's the situate wrapping it up.
Chris Picciurro:We have the financial considerations. We have tax considerations. Then we have these x factors. Could be it could be the, you know, what your what your long term plan is. Do you, you know, do you plan to stay at that house forever?
Chris Picciurro:Because, ultimately, the only way you're gonna get your your cash back out of that house would be to refinance or sell it. You know? So those are all factors. And what's that, what does being debt free mean to you? Is that important to you?
Chris Picciurro:And what is, does that give you peace of mind? In understanding your liquidity and making sure that you have enough in your savings to cover about 3 to 6 months of expenses, and then I would cons that would be my final takeaway is before you consider, you know, depleting any savings, make sure you've got at least 3 months of of fixed living expenses in savings before you do that. And always, John, consult a financial adviser, licensed financial adviser, a tax professional, or you know what? Just go into the defeating taxes private Facebook group and say hello.
John Tripolsky:Absolutely. Absolutely, Chris. Well, thank you so much for diving into this with us. I know at the beginning we said we were gonna give away all the answers. I doubt we gave away all the answers because, right, it's so situationally dependent back to that term.
John Tripolsky:And like you said too, it really does come down. I mean, I see this from both sides. Right? Obviously, we have these conversations. You know, we talk to tons of individuals, tax pros, taxpayers alike, and really just talking with the people on your team and planning for it.
John Tripolsky:This this should never be a, oh, I'm gonna do this and I'm gonna do this next week because this is not a an oopsie situation. Let me take back and and you'll set the reset button and do something else. Like, once it's done, it's done. I mean, if you're depleting an account and say you don't end up using those funds to pay off a mortgage, well, depending on what it is, you already just triggered for a massive tax bill depending on and then you're just sitting on a bunch of cash, and then you're really up, you know, what a creek.
Chris Picciurro:Oh, absolutely. I mean, it it could really backfire if you let's say you took the money out of retirement account, paid off the mortgage. You don't have a mortgage, but you have a tax bill. But now you don't have any cash to pay it. So just build that board of directors we talk about in teaching tax law.
Chris Picciurro:Build your board of directors. If you don't have one, reach out to John and I personally and we will make sure we find someone for you
John Tripolsky:to help you. It's a great way to close it. And as always, as I like to say, you know, maybe to end or not to end, that is the better question as Shakespeare did not say, nor will he ever say because he's no longer able to say that. But on that note, we will see everybody back here next week on the Teaching Tax Flow podcast. Different day, similar time, different topic.
John Tripolsky:Tweak that one a little bit. So until next time, everybody. Thank you for joining us.
Chris Picciurro:Hey, everybody.
John Tripolsky:John here from the teaching tax flow team. That's right. We just episode or we just wrapped up episode 88. Can you believe it? 88 of these shows, you have been listening to us go on and on and on and on.
John Tripolsky:However, I would like to say, I'll toot our horn a little bit or or humble brag as sometimes we like to say, we've had a ton of listeners. We've hit, if I'm remembering right, 50 or 60 different countries. We're talking tens and tens of thousands of listeners on our shows, which is great. We get great feedback. We're hearing all these topics, people coming up to us at events, emails, messages online saying that they've heard heard us, heard a topic.
John Tripolsky:That's what we love to do. That's what we're here for, and again, 88 weekly episodes we have cranked through. However, here's the ask. Keep the topics coming. Not that we're running out of ideas by any stretch of imagination, but the whole point of this show is to literally talk on the topics that you guys are interested in.
John Tripolsky:So if you're interested in a topic, just shoot us an email at hello at teachingtaxflow.com. That's hello at teaching tax flow dot com. Shoot us any ideas you have. The worst thing that could happen is, you know, we just forward the email to Chris and he can tell you no. So just kidding.
John Tripolsky:We won't do that. We take some great, great pride in these. And again, we are here doing these for you. Shoot us those topics. We love them.
John Tripolsky:That's what keeps us going. So, we will see everybody or you should hear everybody, hear us next week here back on the show.
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