Should I Use My Savings To Pay Off my Mortgage?

Should I Use My Savings To Pay Off My Mortgage?

This question is from Karen. She asks, “With interest rates so low, we aren’t earning anything on our savings. I’m also worried about another significant drop in the stock market. Should I take money from my savings to pay off my mortgage?”

Watch Now: Should I Use My Savings To Pay Off My Mortgage?

pay off mortgage

Listen Now:
Should I Use My Savings To Pay Off My Mortgage?

Subscribe Where You Find Your Podcasts

use savings

There are two parts to this. One is eliminating debt. The other is what is the better use of your money?

Paying off debt is never a bad thing, especially as you get closer to retirement. According to the Employee Benefits Research Institute, the largest annual expenditure for people 50 and older is housing. If you can pay off your mortgage before you retire, it can help you have a more successful retirement.

There is also a huge psychological boost to being debt-free. What happens if the economy shuts down again and you get laid off? Not having a mortgage payment can reduce your stress. It’s less stressful knowing you don’t have to come up with $1,000 each month when you’re not working. We cannot underestimate the value of being debt-free.

What is the best way to do this? Here are some factors to consider. These apply whether you’re using a lump sum or paying extra on your principal. 

Compare interest rates

The first thing is to compare your current interest rate to what you earn on your savings and investments. If your mortgage interest rate is high, 4% or more, and you’re earning 0.75% (or less) on your savings, this decision is easy. The difference in the cost of your money compared to what you’re earning is significant. Using your savings to pay down or pay off your mortgage makes a lot of sense. If your interest rate is closer to 3%, and you’re invested in something that has a potential to earn 8%, the math changes.

Your age

The second factor is your age. For someone under 40, the value of compounded returns from investing can be better for your future. If you are closer to retirement, the benefit to paying off that mortgage is more valuable.

use savings pay off mortgage
use savings pay off mortgage

How long will you live there?

Are you planning to stay in your house for a long period of time? If you’re planning to remain there for several years, paying off the mortgage makes more sense. If you’re planning to sell your home in the next 36 months, I’m not sure the answer is as clear. You may not want to pay off your mortgage if you plan to sell it in the very near future.

Tax costs

What are the potential tax costs to raise the funds to pay off your mortgage? Does that come from an IRA or a 401k? If it does, then the entire distribution can be taxable.

Here is an example. If you need $100,000 to pay off your mortgage, you may need to withdraw $133,000 from an IRA. The extra amount will cover the taxes. That is a very expensive way to pay off your mortgage.

Selling stock to pay off your mortgage can also result in a significant tax cost. Your sales proceeds are $100,000. You paid $50,000 for those shares. You will incur $7,500 in capital gains taxes and some additional state income tax. That is also an expensive way to pay off your mortgage.

If the money is in a savings account, there is no tax cost to use it for your mortgage.

Paying off debt is rarely a bad choice, but you need to look at it from all angles and make an intelligent choice.

use savings pay off mortgage

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

Our Most Recent Videos And Posts

How Lower Interest Rates Affect Your Retirement

How Lower Interest Rates Affect Your Retirement

Lower interest rates create some obvious problems for retirees. Things like savings accounts and CD’s just aren’t earning much. But there is a longer-term problem with these low yields. Today, I’ll discuss how lower interest rates affect your retirement.

Watch Now: How Lower Interest Rates Affect Your Retirement

how Lower interest rates affect your retirement

Listen Now:
3 How Lower Interest Rates Affect Your Retirement

Subscribe Where You Find Your Podcasts

How Lower Interest Rates Affect your Retirement

For many, bonds are a significant part of your retirement nest egg. And, in my mind, there are three reasons to use them.

Reason 1: Less Volatility

Bonds reduce volatility. Think about what happened in March. The stock market fell over 30%. If you were 100% invested in equities, your account went down a lot! If you had 40% in bonds, the drop was much smaller.

Reason 2: A Place to Invest Your Future Income

Bonds give you a source of funds to generate your income. Selling stocks when they are down 35% to get your monthly check isn’t ideal. Putting your future income in bonds solves this problem.

Reason 3: A Way to Rebalance

Bonds give you a source of funds to buy stocks at better prices. Let’s say we get another big drop in the stock market in the next few months. I’m not saying we will, but if we do, you have a source of funds to buy stocks at those lower prices.

How Lower Interest Rates Affect Retirement
Click here to subscribe

Lower Risk, Less Return

Owning bonds will reduce your future long-term returns. They just don’t generate the results stocks do. For example, the Vanguard Total Stock Market Index fund has averaged just over 9% per year over the past 15 years.  The Vanguard Total Bond Market Index fund has averaged 4.3% over the same time frame.  Adding more bonds reduces the impact of a bear market.  But it also reduces your future returns.

blank

Low Yields Translate to Lower Future Returns

Last week, we talked about lower expected returns for stocks and how that impacts your retirement.   The current low yield environment also means we should expect lower future returns for bonds too.

In fact, Vanguard recently said we should expect bonds to generate returns of about 1-2% per year over the next decade. 

So if we expect stock market returns of 6.5% and bond returns of 2% here’s what happens.

This is a real challenge when you need your savings to create income and grow to keep pace with inflation.

Lower interest rates and yields could have a major impact on your retirement plans.  It’s worth having a conversation with a financial planner to see how it could affect you.

What do you think?  Add your comments below!

Lower Interest Rates Affect Retirement

 

Don’t Miss An Episode

Get every episode of Monday Morning Money in your inbox.  Join our mailing list.

Subscribe Where You Find Your Podcasts

Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

Our Most Recent Videos And Posts

Should You Refinance Your Mortgage?

Should You Refinance Your Mortgage?

One of the things not mentioned much in the wake of the big stock selloff was the impact on bonds and interest rates.  This has pushed the rate on 15 and 30 year mortgages to levels we haven’t seen since 2012. Today we’ll answer the question, “Should you refinance your mortgage?” (read more below)

Watch Now: Should You Refinance Your Mortgage?

Don't Miss an Episode of Monday Morning Money. Subscribe Today!

Each week we release a new episode of Monday Morning Money.  Stay up to date by joining our email list.  You can also subscribe to our show where you find your podcasts.  Our episodes are on YouTube, Spotify, iTunes, and Google Play.  

Subscribe to Our Mailing List

Subscribe Where You Find Your Podcasts

You can also find our show where you find your other podcasts.  Click the links below to subscribe.  (Please like and rate us on these sites)

Listen Now:
Should You Refinance Your Mortgage

Don't Miss The Next Episode

Each Monday we release a new episode of Monday Morning Money.  Subscribe today to stay up to date and informed.

Find Us On These Podcast Sites

You can also subscribe to our show on:

Schedule a 15 Minute Call

Do you have a question? Would you like to talk about how we can help you plan for a better retirement?
Click here to schedule a brief 15 minute call.  

The Coronavirus Is Also Affecting Bonds

Most of us are aware of what has been going on in the stock market in the past few weeks. Lots of volatility. Big down days, big up days. Just crazy swings.

But, something interesting also happened that nobody really talked about. Yields on bonds plummeted. The yield on 10-year treasuries fell below 1% for the first time ever. And for a moment, it fell below 0.5%

Why is this important? Mortgage rates are closely linked to the yields on 10-year government bonds.  And these record low yields have created a surge in demand to refinance loans.  So, should you refinance your mortgage?  Here are some key things to consider. 

These falling yields mean the interest rates for a mortgage have also dropped. Mortgage rates hit an all-time low in 2012. And we are testing those levels again.

Is it time to refinance your mortgage

Is Now The Time To Refinance?

It may be a good time to consider refinancing the note on your house. So what are some of the things that factor into your decision to refinance or not?

Mortgage Refinance

1. How Much Interest Will You Save?

It takes some time and know-how to compute this. But you can compare how much interest you will pay on your current mortgage to what you’ll pay when you refinance. If there is significant savings, it’s worth looking deeper. 

 

Bonus Tip:

Refinancing may reduce your payment. But consider keeping your monthly payment the same. The extra gets applied to your principal. You’ll pay off your mortgage faster. And you’ll save even more in interest expenses.

mortgage refinance

2. How Much Will It Cost?

Refinancing your loan means some upfront costs. You have origination fees, closing costs, appraisal costs, and maybe some other fees. Do those fees justify the potential savings?

Here's an example

Current Loan

Jane and Bob purchased their house about five years ago.  Their original loan was for $150,000.  The interest rate was 4%.  They have made 60 payments on their house.  

Over the rest of their loan, they will pay about $79,945 in interest expenses. 

Refinance

After looking into refinancing at lower rates, they discovered they will pay about $3,000 in origination fees, closing costs, and other fees.  

The interest rate on their new loan is 3%.  They extend their repayment period by 5 years.  Their monthly payment decreases by $130 per month.  And over the life of the loan they will save over $7,700 in total interest expense.  

Is It Time to Refinance Your Mortgage
click to enlarge

But wait, there's more

They keep their payment the same!

Jane and Bob elect to pay their original payment.  This means they pay an extra $130 per month on the new mortgage.  They will pay it off in 22 years—that’s earlier the original loan.  

Also they will save over $28,000 in total interest costs!

refinance your mortgage

3. Do You Need To Do Major Repairs Or Updates To Your Home?

Over time big things need repaired or replaced. A new roof, a new driveway or new flooring are all big-ticket items. For some, the only way to make those expensive repairs is to tap into the equity they have accumulated. This may be a great opportunity to consider that.

The coronavirus scare has created an opportunity to lower your interest costs. But be careful, check your numbers, and make sure it is the right thing for you to do. If you have questions, talk to a financial planner you know and trust.

Schedule a 15 Minute Call

Do you have a question? Would you like to talk about how we can help you plan for a better retirement?
Click here to schedule a brief 15 minute call.  

What's On Your Mind?

Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

Enter Your Question Here

Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

Our Most Recent Videos And Posts

A Fishy CD Ad

On today’s show, we talk about a fishy CD ad.  It reminds us if things sound too good to be true, they probably are.

Watch: A Fishy CD Ad

Please be sure to subscribe to our YouTube Channel and like our  Facebook page.  

Audio Only Version:

Stay Up To Date. Join Our Mailing List.

Each week we will notify you when a new episode of Monday Morning Money is published. Please complete the form below to subscribe. 

Please Complete the Form To Join Our List

* indicates required

Each Episode of Monday Morning Money is also broadcast on Local Radio, WMOA (1490 AM and 101.3 FM).  You can hear it at 11:07 every Monday. 

Listen Now: A Fishy CD Ad

Stay Up To Date. Join our Mailing List.

Each week, we will notify you when a new episode of Monday Morning Money is published.  Please complete the form below o susbscribe.

Please Complete the Form To Join Our List

* indicates required

Recently, the Federal Reserve reduced short term interest rates, again. And this move impacts savers in a big way. Earlier in the year, we were able to find short term CD’s—meaning 1 year or less—with an annual yield of 2.3% or higher.

Since then we’ve seen those rates drop significantly. The national average annual yield for 6 month CD’s is 0.91%. The highest annual yield reported is 1.85% to 1.9%.  If you are a saver, this low-interest-rate environment is awful. CD buyers are begging for any kind of yield right now.

A Fishy CD Ad

Recently, a client asked us about an ad he saw in a newspaper in Myrtle Beach. The advertised rate for a CD was over 3.5%. That’s almost 4 times the national average. And it is nearly double the highest reported rate by bankrate.com.

An ad like this is going to get people’s attention.

But things like this also make the alarms go off in our head. What is this company doing that allows them to offer a CD with this kind of yield? So we did a little digging, and to no surprise things look a bit suspicious.

1.  It’s Not A Bank Running The Ad

The first thing of note, this isn’t a bank advertising this. Brokerage firms have access to FDIC insured CD’s. And at times those rates are better than what local banks offer. But, when the advertised rate is this much larger?  It raised an eyebrow.

2.  An Insurance Agency Advertises This.

The second thing which got our attention: The company running the ad primarily sells insurance products. And this made us dig a little deeper.

We found this gimmick has been around for a few years. Here is how it works.

The Gimmick

The agency has an ad for a 3.5% 6 month CD. You want to invest $10,000 in one. The agency buys a CD for 1.3%. After 6 months, the bank issuing the CD pays you $65. The agency then pays you $110. You get your 3.5% yield.

A Fishy CD Ad

CAUTION! High Pressure Sales Tactics Ahead

For that $110, the insurance agency gets a captive audience with a yield-hungry, conservative saver. Then they use high-pressure sales tactics for annuities and other insurance products.

Ads like this aren’t necessarily a scam.  But the tactics push ethical boundaries. These agencies design these ads to get your attention and get you in the door. You see, they’ll only talk to you about this in person. And when they have you sitting in front of them, they can put on the full court press to try and sell you something else.

Many times, what they are selling is not always in your best interest. So, if you see an ad like this, be careful. Remember, if it sounds too good to be true, it probably is. And if you are in doubt, talk to an advisor you know and trust.

What's On Your Mind?

Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

Enter Your Question Here

Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

Our Most Recent Videos And Posts

How to Pick Investments for Your 401k

How to Pick Investments for Your 401k Today we discuss how to pick investments for your 401k.  Do the performance statistics matter?  What about expenses? What are the most important
Watch Now

Obstacles To Your Retirement

Obstacles To Your Retirement What are the biggest obstacles to retiring when you want to? Whether you are two years from retirement or 20 years, we all face similar obstacles.
Watch Now

Offered Early Retirement? Start Here.

Offered Early Retirement? Start Here A listener was offered early retirement.  There is a lot to consider before making your decision to retire—even if you weren’t offered an incentive.  If
Watch Now

How Could Your Taxes Change in 2021?

How Could Your Taxes Change in 2021? How could your income taxes change in 2021? We’re still waiting on election results. But we can look ahead to the potential changes
Watch Now