00:00:00
well as we have hit the New Year many
00:00:02
people look to make changes in their
00:00:04
lives so that they can have a better
00:00:06
lifestyle but that can cover a variety
00:00:08
of different elements and when you think
00:00:11
about one's finances you can look at so
00:00:13
many other different things to improve
00:00:16
your Financial Health even something
00:00:18
like paying off your mortgage Michael
00:00:21
Roberts is a professor of Finance here
00:00:23
at the Wharton School Michael great to
00:00:25
have you in the studio great to be here
00:00:27
so the element of paying off the
00:00:28
mortgage obviously is something that's
00:00:30
so many people deal with uh but right
00:00:32
now it's probably even in more focus of
00:00:36
being able to handle it especially with
00:00:38
how interest rates have gone up and that
00:00:40
can obviously provide a lot of stress
00:00:41
for people yeah it's probably people's
00:00:45
largest monthly or recurring payment is
00:00:48
that mortgage and it's there for you
00:00:51
know 10 15 typically 30 years so it's
00:00:55
it's definitely a stressor uh from a
00:00:57
psychological
00:00:58
standpoint um um but I think if people
00:01:02
understand the the mechanics the Basic
00:01:04
Finance of of a mortgage and the broader
00:01:07
picture of their finances it can be less
00:01:10
of a stressor and actually become a
00:01:12
potential asset how so so I'll use
00:01:16
myself as an example uh we had bought a
00:01:18
home seven eight years ago and had
00:01:22
refinanced into a mortgage that was
00:01:26
2.75% oh God bless you for getting for
00:01:29
getting that low mortgage yeah yeah yeah
00:01:31
we we then sold the house but that's
00:01:32
another story so so we had a
00:01:35
2.75%
00:01:36
mortgage now you know three four five
00:01:40
six years
00:01:41
ago um that was certainly low but it
00:01:44
wasn't low relative to what I could
00:01:47
invest money in and earn basically a
00:01:50
guaranteed or or very safe return right
00:01:53
if I put it in treasuries I wasn't
00:01:54
earning 2% I was lucky to get one yeah
00:01:58
okay but fast forward now three years to
00:02:01
today and if you're sitting on a 2.75%
00:02:05
mortgage and interest rates on Treasury
00:02:09
Securities for example or CDs are above
00:02:12
five well that's an opportunity sure
00:02:15
right so you know you want to you want
00:02:18
to think about a
00:02:19
mortgage you know as rationally as we
00:02:23
can in terms of our opportunity cost
00:02:25
right if I if I'm paying 2.75 on a
00:02:28
mortgage that I originated five 10 years
00:02:30
ago and now I can earn five plus
00:02:34
basically guaranteed yeah there's really
00:02:36
no incentive for me to pay that mortgage
00:02:38
down I'd be throwing away money
00:02:40
effectively yeah how much do people
00:02:43
consider the elements of the benefit
00:02:46
that they can gain from that type of
00:02:49
scenario because I I wonder if sometimes
00:02:51
that's an element that is missed along
00:02:53
the way at times it is and and
00:02:56
understandably so because you know
00:02:58
ultimately that decision ision is a
00:03:00
broader tradeoff it's not just a simple
00:03:02
well you know I'm paying 275 I can earn
00:03:05
five it's obvious sure we need to think
00:03:07
about tax implications right because I
00:03:09
got to pay taxes on any of my earnings
00:03:11
but as much as it it pains me to admit
00:03:14
it I I have to because it I see it in
00:03:17
myself you know there's a psychological
00:03:19
value to not having what what uh
00:03:22
academics like to call debt overhang in
00:03:24
some sense right uh being free and clear
00:03:26
on the house and not having to make that
00:03:28
monthly mortgage payment
00:03:30
there's a there is a real psychological
00:03:33
benefit to that and depending upon your
00:03:35
personal makeup that might outweigh the
00:03:38
additional money you could be making by
00:03:40
not paying it down more quickly and I
00:03:44
guess it really ends up being the
00:03:46
individual's decision what their
00:03:47
scenario is because even something like
00:03:50
paying off an extra $100 a month
00:03:53
mortgage on your mortgage can be such a
00:03:55
benefit longer term when you when you
00:03:57
look down the road no no doubt about it
00:03:59
you'll you'll shorten that mortgage
00:04:01
right so you will be free and clear
00:04:02
sooner but but I I worry that some of
00:04:05
the other benefits
00:04:07
of of not paying down that mortgage and
00:04:10
investing or saving that money sometimes
00:04:12
get lost in the discussion you know one
00:04:14
of the one of the issues with paying
00:04:16
that mortgage down quickly is you're
00:04:18
basically investing in the house right
00:04:21
that's you're reallocating your
00:04:22
investment from stock stock market bond
00:04:25
market whatever it it may be into real
00:04:28
estate and that can create problems
00:04:31
number one you can become incredibly
00:04:33
under Diversified right if all your
00:04:35
wealth is sitting in that house yeah and
00:04:37
anything happens to that one asset you
00:04:39
got a big problem but number two that's
00:04:42
a highly a liquid asset so you start
00:04:45
plowing all that savings into the house
00:04:47
and something bad happens you know
00:04:49
medical emergency whatever it may be and
00:04:52
you need money you got a problem right
00:04:55
and in many cases there's just not the
00:04:57
flexibility with paying in into that or
00:05:00
paying extra into that than say you know
00:05:02
having the Savings in a in any other
00:05:05
type of account exactly I I can sell
00:05:07
stocks instantly or bonds instantly uh
00:05:10
so you give up a lot of liquidity you
00:05:13
give up some diversification benefits
00:05:15
when you go all in on the home so I I I
00:05:18
think people need to think about these
00:05:19
other considerations in the context of
00:05:21
their broader portfolio thank you for
00:05:24
listening to the ripple effect we hope
00:05:26
you found this episode informative and
00:05:27
engaging don't forget to subscribe cribe
00:05:29
and leave us a review so that we can
00:05:31
continue to bring you the best Insight
00:05:34
from the Wharton School
