Should You Make EXTRA Payments Towards Your Mortgage? Money Q&A

Transcript:

On this episode of the personal finance podcast, should you make extra payments towards your mortgage? Let's get into this on this money. Q and a.

Welcome to the personal finance podcast. I'm your host, Andrew, founder of master money. co. And today on the personal finance podcast. We're going to be talking through a bunch of your questions on this money. Q and a, if you guys want your question answered, make sure you're signed up for the master money newsletter.

And that is the best way to get ahold of me. Anytime those newsletters come out every single week, you can just respond to those newsletters and ask me those questions there and. Don't forget to follow us on Spotify, Apple podcasts, or whatever podcast player you love to listen to this podcast on, and don't forget to leave a five star rating and review on Apple podcasts, Spotify, or your favorite podcast player truly does help out the show and cannot thank you guys enough for leaving those five star ratings and reviews.

And if you want to watch this, you can check this out on YouTube as well on the Andrew Gen Cola YouTube channel. Now, today we are going to be diving into four major questions that you guys have today, and we're going to also talk through how to protect yourself from the latest finance scam that's going around online today.

So in the first question, we're going to talk through, should you make Extra mortgage payments. Uh, and how will that help you in terms of paying down your mortgage faster? And how should I think through that process? Then we're going to talk through, should you be counting cash when you are factoring in the 4 percent rule and the safe withdrawal rate, and we'll dive into that.

Then can we combine Roth's as a husband and wife into one account? And does that help us in any way, shape or form if we can do that? So we're going to dive into the Roth IRA and if you can combine accounts. And then lastly, we are going to be talking about that latest scam that is going around right now.

Right now. And this scam is going to be really important for you to kind of listen into and probably tell a lot of your parents now as they're getting closer and closer to being of age, uh, and protect themselves against this scam. So this is an action packed episodes without further ado, let's get into it.

All right. So the first question is, Hey, Andrew, I love the show and wanted to see if you could talk through making extra mortgage payments, I'm trying to decide when I should make extra mortgage payments. And if it even makes sense for my specific situation. Yeah. Thank you so much for all you do, and I appreciate all your help.

So this is a great question, and this is one, um, that I am really, really fond of. I remember the first time that I went out and I bought my first house, the agent who sold me that original house said to me, Hey, did you know that if you make additional payments on your mortgage, you could pay your mortgage off X amount of times faster?

And I think originally she said something like, Seven years faster, uh, just by making a few extra payments on your mortgage. And this is something that is true. You can actually significantly accelerate your payoff path on your mortgage by making extra payments. So say you have a 240, 000 house that you probably bought years ago, because it's hard to find a house that costs 240, 000 now, uh, and you had a 30 year mortgage with a 7 percent interest rate and a monthly payment that came out to 1597.

And that's for your principal and your interest. If you made an extra payment, just once every quarter, every single quarter, you'd pay off your house nearly 15 years early. And that would mean cutting the length of your mortgage in half and saving a whopping 184, 000 in interest along the way. Now, this is a very powerful thing that you can do, especially if you have a lot of money and you are sort of hitting some of your financial goals.

But we're going to talk about kind of what situation you should be using this strategy. And then there are some situations where you should definitely not be using this strategy as you start to approach and go forward. So the first thing I want you to do is when you want to think about paying off your mortgage, I want you to think about your current financial situation.

Number one, do you have a fully funded emergency fund? If you were not aware of emergency funds before you bought your house, in my opinion, you need to have a fully funded emergency fund before you ever consider buying a house. Now I want to say this upfront. Okay. Everybody needs to understand this. And we have a calculator that will show you exactly how this works.

Your home. Is not that great of an investment and people get upset when I say this, but the reason why they get upset is because they've never run the numbers on buying a house. When you buy a house, you need to factor in total cost of ownership and total cost of ownership is going to factor in things like your interest rate.

It's going to factor in Monthly maintenance cost. It's going to factor in capital expenditures, meaning roof going bad, AC going bad, big, big ticket items. This is going to factor in your landscaping and making sure you fix things when they break. Everything is your responsibility. In addition, it's going to factor in things like taxes.

It's going to factor in things like HOA fees. The list goes on and on and on of all the different things that you need to fix, repair, maintain when you own a home. This is not to say that you should not buy a home. I am a longtime homeowner. I've owned my own house for well over 10 years. And there are multiple factors why I bought a house.

Financial reasons is not one of those factors. Lifestyle reasons. Is one of those factors. Maybe you want to be in a good school district. You want a home to build your family and your life. And there's so many different reasons. You love interior decoration, and you can't do that when you rent. All of that stuff is fantastic and a great reason because you are buying a house based on your values.

And so I want you to evaluate your current financial situation first and make sure you have that six month emergency fund funded before you buy a house. It's number one. You also need to make sure you have high interest debt paid off and it is gone. Anything above a 6 percent interest rate outside of your mortgage is high interest debt.

And that needs to be paid off first, before you start making these extra payments towards your mortgage. Okay. In addition, you also need to be making your retirement contributions. I'm talking about your HSA, your IRA, and making contributions where you're actually hitting retirement goals. Cause a paid off house is not worth anything.

If you have no cash to retire, once you get to that point in time. So making sure you're hitting those retirement goals and nailing that is going to be really, really important. Okay. So if you evaluate your current financial situation, you're doing all this stuff. You're knocking out the big ticket items and you're making sure you have that emergency fund, high interest debt paid off and retirement contributions are rolling for you.

Then I absolutely love the possibility of you considering paying off your mortgage based on your current financial goals. You got to know what your financial goals are. And if you think this is one of your big goals because debt bothers you, then this is a great reason to do this. Now. For me, for example, I have an interest rate of 2.

5 percent on my house because I got lucky and just bought a house in covid. I didn't have any foresight. I just got super lucky and bought a house during covid when interest rates were extremely low. Guess what? I'm not paying that thing off ever if I don't have to. And so for me specifically, I am not interested in paying that thing off quickly, but some people out there may not like having debt.

And so they want to pay some of this stuff off. Next. I want you in step two to understand your mortgage terms. So this means you need to understand your loan type and determine if your mortgage is fixed or adjustable, because this can affect how those extra payments actually impact your loan. Last thing you want to do is throw extra payments at your loan and you're paying off just a bunch of extra interest instead of paying down principle.

Secondly, I want you to know that interest rate because you need to know your mortgage interest rate and how it compares to current rates. Lastly, I want you to look for something called prepayment penalties. And if you went into buying a home without understanding what prepayment penalties are, and someone put prepayment penalties on your mortgage, then we're going to have to look at this because what that means is that If you make extra mortgage payments, sometimes and you pay down your mortgage faster, sometimes they will penalize you for doing so.

This is usually means that you have a bad loan, a bad mortgage situation. Um, but if you have those prepayment penalties, you definitely want to look into that first. Most people. Nowadays, uh, no to avoid those. But if you did not avoid those and you have them, no big deal, but we got to make sure that we know that before we make these extra payments.

Then number three is I want you to go on and use an online calculator. There's a million of them out there and input your loan details into an online mortgage calculator. And I want you to see how much interest you can save by making these Extra payments. Now, there's a difference between your principle and your interest.

And what you want to do is you want to try to pay down your principle, meaning the amount of money that you actually owe. You want that to go towards your principle, reducing the amount of interest over the life of your loan. That's very important to understand is you want to pay down that principle so you owe less instead of paying down interest.

Now, a lot of interest on mortgages is front loaded, meaning that they put the majority of the interest On the front end of the house. Why would they ever do that? Why do they want to front load this interest? Well, they know on average, the average person sells their home every five to seven years. And so they're trying to gain as much interest as possible off you when you start to pay it on that house.

If you've ever bought a house and you look at your mortgage and say, Hey, this thing is not getting paid down very quickly. What the heck is going on here? It's because they front loaded interest on your mortgage. And that's typically what they like to do in order to get the maximum amount of money they possibly can.

Now, once you've done all this, And you've looked at the online calculator. You've determined the difference between principal and interest, and you want to make principal payments towards your mortgage. Now it's time to actually determine the extra amount that you want to pay down on this house. And so you look at your monthly budget, you break down your cashflow and your money flow that you have coming in and you going out and you want to make these consistent extra payments.

And so you set up a plan for this. And so you go in. And you set up extra automatic payments. We want to make this automatic. We don't want to manually be doing this every quarter or every month. If possible. We want to make sure we set up these automatic extra payments with our lender to make sure that everything is efficient.

Everything in your personal finances should be automated and automation is the way to build wealth without having to lift a finger. And you're going to build wealth so much faster. If you automate your money, automate, automate, automate. We are coming out. I promise you, we are coming out with an exact.

Course and system on how to automate your money. I know I've been talking about this for a long time, but I want to make sure we get it right because automation is going to change your life if you do it right. And now when you set up those automatic payments, you need to specify that you're making this payment on the principle.

When you're making extra payments, they should go toward the principle to ensure that you are reducing your loan balance. It is so important to do that. You got to remember that these payments need to go towards the principle. Then I want you to monitor your progress. So when you go through this process, I want you to look at your progress, regularly review your mortgage statements to ensure these extra payments are being applied correctly, and then adjust as needed.

So you just got to make sure that these are being applied. Sometimes I've seen banks make mistakes where I've gone through mastermind and coaching sessions, and I've looked at certain situations that, Hey, Your bank is actually making a mistake here and they're putting this towards interest. Uh, you want to be going towards principle.

So you got to make sure that they're doing the right thing there. And then if anything else changes in life, you are not tied down to this. You don't have to worry about this. You can always make changes back to the original payments that you had. So this is going to be really, really important, I think, But for a lot of people, those are the steps I would take to consider prior to making those extra payments is make sure you have your financial situation down, understand your mortgage terms, calculate those potential savings and make sure that's worth it to you.

And you actually value that. Would you rather have experiences over calculating that potential savings? You just got to make sure that you prioritize those dollars so they are going exactly to where you value. And then once you have all that stuff down, then you could start making those principal payments towards your mortgage.

Listen, I hope this help. If you have any additional questions, please reach out to me. Let's get to the next question. All right. Question number two, and we're talking about cash in the 4 percent rule here on this question. So here's the question. Thank you so much for everything you're doing. I'm a fan of the podcast and would like to retire sooner rather than later, like most of us.

And I've been using the calculation for retirement being annual income multiplied by 25. And I have a clarifying question. Does the resulting number need to be strictly invested? For example, my total portfolio is about two thirds invested the 401k Roth IRA tactical brokerage. That's fantastic. And one third in cash, meaning emergency fund plus high interest savings.

What I only count the portion that's invested as the times 25 number because I'm drawing off the investment gains in retirement or is that combined number of invested plus cash? If it's the latter, Is there a general rule of thumb on proportion invested versus cash? I do know the older you get, the more you want to limit risk and favor stable income.

So this is an absolutely fantastic question. And one that I can see where the confusion may come into play. But when it comes to the 25x rule for people who don't understand what that calculation is, What you do is when you're trying to calculate your fire number, your retirement number, that freedom number that we're all looking for.

When we want to leave our job and finally become free from having to work day in and day out, we want to take how much we want to spend every single year in retirement and multiply that number by 25. Now the math for this comes out to a number that's going to allow us to draw down. 4 percent of that portfolio every single year.

And so this is based on the 4 percent rule and what the 4 percent rule actually states is that the first year you draw it on 4 percent and then every year after you draw it on 4 percent plus the inflation rate. And so when you come to this number, this is going to help you figure out, Hey, can I retire?

And what is my freedom to retire? Number. Now, when it comes to figuring out, can you actually apply cash to this number? Uh, this is something that I personally would not do. And so when you have cash on hand, cash is your safety net. Cash is there to be utilized when you get in tough and sticky situations.

Cash is security and cash is the thing that is very, very powerful to have, especially in retirement. So I have nothing wrong with the amount of cash that you have. Some people would recommend. Hey. Invest more cash if you can, but your portfolio shouldn't be 33 percent cash. I somewhat agree with that. I would have less of a percentage of my portfolio in cash, but guess what?

I truly believe that a lot of people out there feel more secure with more cash. I am one of those people. In fact, I hold more cash on hand than most people would recommend. But the reason why I do that is because I know cash is security. And so having that in place means that I am less likely to fall during a financial risk, some sort of financial risk that could happen in my life.

I am less likely for that to knock me out of the game. And so I want to make sure that I have more cash on hand. So I say to most people, Hey, minimum six month emergency fund. And most people will say three to six months. I think three months is hogwash. I used to say three months as well, but I think six months is where you have to be because there are too many things that could happen to you in life that could knock you off track.

And the last thing you want to do when it comes to your finances is get derailed and get knocked off track. track. Instead, you want to make sure that you protect yourself. You create this moat around your personal finances, so then nothing can get to you and nothing can get in your way. Instead, you can keep on progressing month in month out so that you can hit your personal finance goals.

And so I love that you have cash on hand. There's nothing wrong with that whatsoever, but I would not apply that cash on hand. To the 25 X rule. You want to make sure that the 25 X run, the 4 percent rule is your dollars invested. So this can be part of your asset allocation. It can be stocks and bonds.

It's not just stocks, but it is stocks and bonds. And so this is definitely something that you factor in. So the portion of your portfolio that you have, the two thirds. That is invested. That's where I would calculate that number, the cash on hand, stay set aside for your financial emergencies, de risking your financial situation.

It is just as important as anything else. In fact, that's why it is part of the foundation of personal finances. You have to have that. First foundation of no high interest debt, having that emergency fund, all of that needs to be in place prior to doing any of this other stuff, because it protects you against life.

And it's not, if an emergency is going to happen, it is, when will an emergency happen? And so you have to have that protection in place. So you have that peace of mind in place. And then as you get older, you can adjust for that risk. So. For younger investors, I like you to have a larger portion of your investment portfolio invested in things like stocks.

And then as you start to progress in age, then you can go more towards bonds so that you have less of that risk coming into play. You reduce volatility within the market and you can have that in play. So bonds are great. Making sure you have that available is going to be really, really important. But when you try to do this calculation, focus only on your invested assets.

Don't factor in cash when you're doing the calculation. And this may change your decision to have so much cash on hand. If you have hundreds of thousands of dollars in cash on hand, Then that's probably something where I would consider, you know, investing more of that. But if you have enough to cover one year expenses, and then you want to save some extra for approaching maybe two years of expenses, no problem there.

That's not an issue to me at all. But if it's a huge portion of your portfolio, 33 percent is pretty high. So if it's a huge portion of your portfolio and it's a big, big number, uh, maybe considering reinvesting some of that, if you have a longer time horizon and your risk profile is okay with that, then I would consider that as well.

Personally, if I was in that situation. So it's just kind of assessing that risk and where your risk tolerance lies, but don't factor in the 25 X number to your cash, just factor it in to your invested assets. All right. So the next question is, Hey, love the podcast and listen all the time. I am married and I have my own Roth IRA and my spouse has a 401k through work.

I'm thinking of open up a Roth IRA for my wife. And my question is, can my wife contribute all of her Roth IRA dollars directly into my account to grow it faster? Or does she have to have a completely separate account to start building wealth from scratch? So great question. And first thing I want to kind of address here on this question is that when you combine money in accounts.

It does not make your money grow faster. Now, this is a very common misconception from a lot of people. Um, but when you put your money together in the same investment account, it actually does not grow faster. And I'm going to show you examples here, uh, in a second, but compound interest doesn't work that way.

It doesn't work in a way where when you have more money combined in one account, it will actually compound faster. So I'm going to show you some examples here in a second. When we talk through this. So let's look at having combined or separate Roth IRAs. So the only way that the IRS will allow you to max out your Roth IRA is if you each have your own Roth IRA account.

So the limit currently right now is to put 7, 000 per year into a Roth IRA. If you're under the age of 50, and then you can put an additional 1, 000 catch a contribution for those age 50 and older. And in that situation, you can only put 7, 000 in a Roth IRA in your account. Okay. And you can put 70, 000 in your wife's account, but they have to be separated.

But the good news is doesn't matter because combining those accounts will not make this grow faster. And let me just give you a quick example here. So say, for example, you put 7, 000 per year and you get a 7 percent rate of return. And over the course of 40 years, We want to see where that number lies in your account.

And we get the same exact thing. So we put 7, 000 into your wife's account, 7 percent per year. And then over the course of 40 years, let's just say, for example, this was in an account that you could combine. So if you combined the money, In an account, then what you would come out with is 2, 794, 891 over the course of 40 years.

So if you both max out your Roth IRA, you got a 7 percent rate of return. That's how much you would have between a combined Roth IRA, which is not possible. Okay. So you cannot combine them. But if you put them in two separate accounts with the same exact return rate over the course of 40 years, then you would You will have 1, 397, 445, which is exactly half of what it would be if you combined them in the same account.

So it does not grow any faster at all by combining them in the same account. It's a common misconception. I think we've had a couple of Q and a episodes where we talked through that as well, um, and kind of went through some more math examples. So I won't go through a bunch of them today, but just know a, to answer your question quickly, but.

You can't combine them into one account. You have to have two separate Roth IRAs, one in each name, if you want to max both of them out. And then secondly, the good news is combining your accounts won't grow your money faster. So you don't have to worry about that when it comes to compound interest. So I hope that helps answer your question and thank you for sending it in.

All right. The last question is thank you so much for your Q and a episodes where you talk through different scams. I had a question that my mom just asked me. As she saw, there was a increasing number of social security scams going on. How can someone who is approaching social security age protect themselves against social security scams?

This is a great question, and I appreciate you sending this in. So if you don't know, if you're new to the podcast, we talk about different scams that go on probably once a month or so, twice a month. Um, and it's because the amount of scams that are going on right now In the world, especially financial scams are growing very rapidly.

The increase of AI and in addition, the increase of people utilizing their financial information on the internet is causing a rapid rise in the amount of money being lost to scammers. And so I am trying to help you at all costs possible, avoid this stuff. Now, most people don't talk about this stuff because they think there's more exciting things to talk about.

I think this is one of the most important things that you need to have is a financial protection plan. And so when you want to put this financial protection plan together, you also want to make sure that you're protecting yourselves and your loved ones as well. So if you're approaching social security age, then you need to listen into this.

And if you have parents who are collecting social security, you also need to listen to this because this is something that is really, really important. There are a lot of folks out there who are now scamming people pretending to be the social security administration. And so they do this to steal personal information and or to steal money.

And what happens is these scams can lead to significant financial loss and or identity theft and people have no idea that it's happening. And so I want to make sure that people are protected from this. And this is why I'm so glad this question came in, because there is a massive rise in this. And so one thing that scammers will do is they will call people claiming to be the Social Security Administration, and then they'll say their issues with their social security number and or account, and they may threaten to arrest or suspend people in order to extract payments and or personal information.

And so some of the methodologies that they use is they use intimidation. They try to use payment methods. They try to demand payments via retail gift cards, prepaid debit cards, wire transfers, currency, cash, all this different stuff is how they actually try to extract that. And then they'll also try to take their personal data so they can open up loans or credit cards in their name.

So these are some of the things that they're doing. And they're trying to prey on people who may know less. About some of these scams than others do. So if you have a parent or if you are approaching social security, I want you to send this to all the people, you know, who are approaching that age, because they want to try to obtain your personal data.

Now, where do they get your personal information? They get it from data brokers. So all of us have personal information on the internet. And so when they try to extract that personal information, they go to data brokers to get that information. Now scammers buy personal information from data brokers, including phone numbers and social security numbers sometimes.

Um, and they could do this legally from data broker websites. Now, one big thing that you can do is you can go to a website called delete me and delete me is by far my favorite service that I have been using over the course of the last couple of years and delete me is a service that will remove your data from the web.

To avoid scams, spam, stalkers, all that different kind of stuff. And so when I would Google myself, I'd Google my information and I would look up my phone number, I would look up my address and quotations. All of a sudden I saw my name over all these websites. I didn't want to be on now. Over half a million people listen to this podcast.

My name is in a lot of different places now, but. But there are certain websites I don't want my name on whatsoever. And it's on these data broker websites. And so I went out to delete me and I contacted them. I said, Hey, I need to get my information off of here. I tried to do it myself. It took forever.

And so delete me actually will remove that information for you. And they do it for very, very cheap. They have different monthly plans and, or you can just go out there and get it all removed for the year with one cost. Or you could get it billed annually, you can save yourself some money, um, and you can get it all removed.

And so delete me is by far the best service. They go to all those data brokers. They remove your personal information. They removed my personal information from thousands of different data brokers. I had my identity stolen a long time ago, and those data brokers had a lot of my information. They removed it from there and really, really saved me hours and hours of time.

So if you go to join delete me.com. Slash PFP 20, you can get 20 percent off, uh, delete me. And so it's a really, really great way to save some money on their service. And by far, it is my place to get your info removed. And they also scan and remove your personal information regularly all year long. So they're always looking for that as well.

So anyways, that is my favorite place to look for that. If you are looking to do that. And the other way that they do this is they also look at public records and social media to gather information when it comes to these scammers. So they will look for social media, public records to remove your personal information.

Now. How do you protect yourself? Number one is you hang up immediately if you think the social security administration is calling you. Number two is the Social Security Administration actually has online accounts that you can set up and you can monitor those accounts for issues. So if there's an issue coming up, making sure you're talking to the right person and make sure that you know what's going on.

Now, number three is you're confused and you don't know what's going on. Make sure you ask for advice. You consult your trusted friends or family before making any financial decisions when it comes to Social Security. If somebody calls you like this, they try to make you panic. Do not panic whatsoever.

Instead, say, hey. I'm gonna go figure this out. I'm gonna call you back. I'm gonna talk to some of my family members and friends, and I'm gonna find the correct number to make sure you are the right person. And then I'll call you back. And so that's really, really important that you can do now to protect your online privacy.

We've had a lot of episodes talking about that. You can use two factor authentication. You can use a VPN. You can use tracker blockers. You could provide email encrypted messaging apps. You can delete that personal data like we just talked about. Um, and so there's a lot of things that you can do to make sure that you are protecting yourself.

You can also make social accounts private. And then also when you're using websites that you're just unsure about, you're not sure if you trust them, you don't have to use your information. You can use a different name. If you have to create an account somewhere for some website, you don't really know a ton about, uh, so you don't have to actually give them any information.

And so. Make sure you tackle that root cause. Use delete me to remove your personal information. If you haven't done so already, a ton of our listeners have already done so. And we've gotten some amazing feedback. So that's another option, but that is exactly the steps that I would take to protect yourself from social security scams, because they are happening more and more, and they are preying on innocent people who worked really hard.

And this is part of their retirement. So I want to make sure that everybody is aware of this and this to your friends and this to your family, and, or if you're approaching social security age, then make sure, you know, this as well. Uh, And protect yourself because you'll start to hear the phone ring once you start to get to that age and social security age.

So listen, hope you guys enjoyed this episode. Thank you so much for joining me today and investing in yourself because that's exactly what you're doing when you listen to this podcast. Can I thank you guys enough for joining me today? And guess what? I hope you have a great rest of the week. We will see you on the next episode.