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