Should I consider overpaying my mortgage?

Ralph
00:00:00

Have you ever felt stuck with your mortgage payment? Maybe you're wondering if there's a way to break free from this 30-year commitment even sooner than that. If you're tired of seeing a large portion of your hard earned money go towards interest payments, you're not alone. Today, we'll uncover how making extra mortgage payments could potentially save you thousands of dollars, but also why it might not be the wisest financial move. Our listener Maria asks, should I consider overpaying my mortgage? I'm going to answer that question today on the show.

Announcer
00:00:32

Welcome to the Ask Ralph podcast where listening to an experienced financial professional with over 30 years of experience can help you make sense of confusing questions, current headlines and industry trends about taxes, small business, financial decision making, investment strategies, and even the art of proper budgeting. Ask Ralph makes the complex simple by sharing his real world knowledge from a Christian perspective with all things financial.

Now here's your Host, Ralph Estep Jr.

Ralph
00:01:01

Well, thank you for joining me today. If you missed yesterday's show, we discussed why filing a tax return, even when you might not be required maybe the best thing to do. So I'm going to encourage you if you missed it, check it out because there are some surprising benefits that could put extra money in your pocket by filing tax returns, even though you're not technically required to. So I'm again, I'm going to encourage you to check that out.

Well, let me share a heartfelt message I received from Maria today. She says this. She says, "Dear Ralph, I'm writing to you with a heavy heart and a lot of uncertainty. My husband and I have been blessed with a promotion at work that gives me an extra $500 a month. But this decision I'm trying to make is keeping me up at night. We have a 30-year mortgage at 4.5% with 27 years left to go. Every month when I make the payment, I feel this overwhelming burden knowing we'll be in our mid-sixties before this house is even paid off. The thought of being tied to this debt for so long makes me feel like we're not being good stewards of God's blessings. Just last night, I was looking at our mortgage statement and seeing how much of our payment goes to interest nearly brought me to tears. I keep thinking about Proverbs and how the borrower was servant to the lender. Some of our church friends tell us to throw every extra penny at the mortgage, while others say we should invest instead. I'm paralyzed with indecision, Ralph. When I pray about it, I feel confused about what God wants us to do with this extra money. Should I consider overpaying my mortgage, or am I missing something bigger in God's plans for our finances?"

Well Maria, your question is a great one. It's a question I get routinely in my practice. And your question really is the core of it is all about biblical stewardship and listen, I get it. It's a very emotional struggle. Many of us have considered this. But we need to think about this in context of proper financial planning and also a question of cashflow.

And that's what we're going to talk about on this show. Well now, while we're talking about questions, remember this, this show thrives on your questions. But today, I want to ask you some questions. I've built a listener survey, and I want your honest opinion about the show. And listen, it'll only take about five minutes and here's the best part.

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Now Maria, when you wrote your letter to me, you mentioned Proverbs 22:7, and it's certainly appropriate here. So let's go right to that text. And this is what it says. It says, "The rich rule over the poor, and the borrower is slave to the lender." And what does that remind us, Maria? It reminds us that debt can be a form of bondage. That mortgage could turn into a form of bondage. And the other side of that, it requires us to be wise stewards of all of our resources. And that's going to be our guide today. Maria, we're going to put together an answer to your question.

Now there are a lot of different approaches to making mortgage overpayments. Basically what I'm talking about here is that decision to make an extra principle payment, whether that be monthly, once a year, whatever those things look like. So I'm going to share some options with this, and I'm going to tie in some stories of clients I've worked with over the years. I'm going to call this first one. Story number one, the cautionary tale. So let me tell you about my clients, James and Sarah. Now they were excited. They were really excited. They came to see me. They said, Ralph, you'll never believe what we're doing. Every month, we're putting an extra 300 bucks towards our mortgage. And I said, that seems great.

That's fantastic. But I said, well, tell me about your finances. So here's the problem. When I reviewed their finances, guess what? They had $15,000 in credit card debt. And that credit card debt was at 18% interest. Not good. The next thing I asked them, I said, okay, well now tell me about your emergency fund. You're not going to like their answer.

Their answer was Ralph, we've got zero emergency funds. I'm not sure that paying that extra $300 a month really makes sense. So here's my advice to them. I said, the first thing you folks need to do is stop making that extra $300 payment. Now that may sound counterintuitive. But they had bigger fish to fry as they say.

So the first thing I told them to do. Build an emergency fund. The second thing I told them to do is tackle that credit card debt. You've got to focus on the highest interest rates first. Work on building that emergency fund. Yes, they had great intentions. Their intentions were to pay down that mortgage. But their mortgage rate was a third or maybe even a quarter of what these credit cards were costing them. So they should have been focused on sending that extra money every month to pay off those credit cards.

And again, they had no emergency fund. So here's the deal. My answer to this story number one is don't start paying extra mortgage payments and we'll talk about some strategies later in the show. But this was not the best financial decision. So let's move on to story number two. I called this one the strategic success. So, let me talk to you about Tom and Rachel.

Now, Tom and Rachel was a couple, they had their financial house in order. Let me tell you, these folks were conscientious. They did the budgeting thing we talk about. I think they're avid listeners to the show. Here's a great part. They had zero consumer debt. I'm talking no credit card debt, no car loan debt.

None of that. No extra loans anywhere. Another beautiful thing they had is they got a six months of income emergency fund. Now listen, a lot of people don't have that. But they were conscientious. Like I said, they were strategic and here's the best part. They were putting 15% each into their retirement savings.

So they were right on track. And guess what they started doing. They said, Ralph, here's what we're going to do. We're going to throw an extra $200 a month to the mortgage. And I said, you know, in your situation, that's a great idea. You've got no debt. You've got a healthy emergency fund. You're putting money into retirement. And let's fast forward five years.

Guess what? This is the truth. By doing that extra $200 a month, they reduced their 30-year mortgage by seven years. Yeah. They took it from 30 years to 23 years. What's that going to save them? Here's what it's going to save them. It saved them $43,000 in interest. That's just over that five-year period. So for this one, I say job well done.

That's a great stewardship example and a well-rounded plan. Let's look at story number three, and I call this the balanced approach. Let me introduce you to Michael. Now Michael's a single dad. He's had a rough kind of life. And what Michael said, is Ralph, I don't have a lot of extra money, but here's what I can do. I can add a hundred dollars a month to my mortgage payments. And I said, Michael, that's fine, but just be sure that you're doing putting money towards your emergency fund. He didn't have any credit card debt.

He had some little odds and ends. So he is focusing on that. He was still focusing on his retirement savings. But he said, Ralph, I can do this a hundred dollars a month. I said, that's fantastic. So he did that. He put a hundred dollars a month. And we projected that he's going to save $27,000 in interest. And he's going to shorten his mortgage duration from 30 years to 27 years.

So that's three years that he's cutting off his mortgage and think about it. This is the moral of this particular story is even small amounts make big differences. A lot of people come to me say, Ralph, I can never pay extra on my mortgage. I say, can you send them an extra 50 bucks a month? Can you send them an extra 25? And these are some great stories that I've mentioned today, and they really demonstrate the impact of mortgage payments. But here's the question you might be left with and it's the whole point of today's show. And that is Ralph, when does overpaying your mortgage makes sense? I've shared some different stories and here's the bottom line. Here's my top four things or four reasons, or four purposes when overpaying makes sense. First one is this. When you have no high interest debt. Listen, if you've got credit card debt, if you've got high interest debt of any kind, installment loans, whatever they are, you got to focus on those things first.

It makes no sense, 0 cents to pay down your mortgage, which is generally going to be at a better rate as compared to paying down those 18 or 23% credit cards or high-interest debt. So don't make extra mortgage payments while you still got high interest debt. Number two thing on why does overpaying your mortgage makes sense. When you have a solid emergency fund, like I talked about with my client. They were strategic.

They had six months in their solid emergency fund. I'm not saying you have to have six months’ worth of income. But have a solid emergency fund. And then once you do that, then start making those extra mortgage payments. Another thing you don't want to miss. That's number three here is that when your retirement savings are on track.

Listen, if you're not putting money into your retirement, if you're not getting to that 15 or 20% of your annual income, I would highly recommend that you do that. Why? For two reasons. Number one reason, you can't start too early putting the money into retirement. I did a show a couple of days ago, and I talked about how that multiplies so quickly. So if you didn't listen to it, go back and check it out.

But here's the other side of that. Every dollar you put into retirement savings is basically saving you your tax rate. So let me give you a simple example. For every dollar you put into retirement, it's really only costing you about 70 cents because you're like, I'm just assuming you're 24% federal tax, 6% state.

So every dollar you get a 30% return on your investment right away. A lot of people don't tell you that, but that is the honest to God truth. So I would rather see you get into those maximum retirement savings and putting that 30% in your pocket than to pay down that four or five, six, or even 7% mortgage rate. And last thing on the list when it makes sense. When you're not sacrificing other financial goals.

And that's kind of the things we talked about. Those financial goals will be things like putting money away for retirement. We talked about that having that emergency fund. Maybe you're putting money into an HSA for health insurance. Maybe you're putting money into an education plan for your kids.

Those things need to take priority before you start paying down extra on that mortgage. So now I'm going to answer the other question that you might be thinking. Okay. Ralph, you told me when it's a good idea. When is it not a good idea? And it's kind of the counterpoint to what we just talked about.

It's not a good idea when you're carrying credit card balances. If you've got credit card debt and you're paying extra on your mortgage, stop doing that now. Take that extra money that you're paying on the mortgage and pay down that credit card debt. Start working to zero out those things, whether you use the avalanche method, the snowball method. Start with the highest interest rates and pay those down first.

Number two reason when making overpayments doesn't make sense. If you don't have an emergency savings fund. That is critical. You never know when something's going to happen. Listen, just the other night. My wife and I were getting ready to go to bed. And half of our house went the electric went out.

So I trudged down to the basement. We have a panel and a sub panel, and I realized that the whole sub panel is not working. Well, guess what? Emergency repair, emergency electrician coming out because now I've got to replace my whole panel. It's going to cost about $3,000. Well, those are those emergency things.

If I didn't have an emergency fund ready to do that, I can't call the mortgage company and say, Hey guys, I've been paying extra on my mortgage for the last two years. Can you send me a couple dollars so I can have this electric fixed? No, no, no, you can't do that. You've got to have that emergency savings fund. Number three thing when it doesn't make sense.

If you're not maximizing employer retirement matches. I did a show about this the other day as well. If you're not at least putting enough into retirement to where you're getting that match. And what I mean by that is let's say you work for an employer, and they match 6% of whatever you put into the retirement.

Listen. If you're not doing at least 6%, but you're putting money towards your mortgage and extra, stop doing it. Put that extra money into your retirement plan to at least get to the point when you have that match. And number four, like I said, if you've got any other high interest debt, whether that be student loans, whether that be installment loans, whatever those things are, people got all kinds of debts.

If you got a car loan, it's got a great high debt on it. Address those things first, like I said, put those things in order of interest rates. Yes. The mortgage is going to be more dynamic because it's usually your biggest balance. But if you're paying 18, 20, 25, I saw a rate the other day. Somebody was paying almost 30% on an installment loan. It makes no sense to do that if you’re paying these interests. Don't pay extra on the mortgage. And it kind of reminds me, you know, Maria, your situation kind of reminds me of my mother. I miss her everyday. She passed away two years ago, March. But she taught me some valuable lessons. And it's the lesson I want to share with you today.

And that's how to balance that faith and finance. She always said, Ralph, being a good steward isn't just about the number. So Maria might say, wow. You know, you sit in your question, Ralph, I don't know what I'm doing. Am I doing the right thing? It's not just about the numbers. It's about making wise choices that honor God with each and every dollar you've been blessed with.

And that's why I'm saying that should be our goal. So if Maria, you've got a good retirement savings plan, if you've got that emergency fund, if you don't have that credit card debt, then absolutely pay extra on that mortgage. See what you can afford to do and do it. But you got to look at your overall financial picture.

And like I said, that should be our goal. To look at each and every dollar that we've been blessed with and decide what you should do. Now, here's what I want to take a few minutes and do. I want to really demonstrate the impact of making extra payments and what that amount could have mean to you. Let's just say you add a hundred dollars a month.

I have a client, Jennifer. That's what she did. She put a hundred dollars extra a month. And when we talked about it, she said, Ralph, you know, it's kind of like I don't go to Starbucks as often, you know, I'm not sure it's a few premium coffee runs, but it's a few, it's a few. And she said, Ralph, here's what she said to me.

I'm going to read this exactly what she said to me. She said, Ralph, I barely noticed a difference in my monthly budget. And like I said, she's doing an extra a hundred dollars a month, but now I'm saving $27,000 in interest. And guess what Ralph, when I put my head on, when I put my head on the pillow at night, I sleep better at night. And think about it.

This small change. A hundred dollars a month has cut three years off of Jennifer's mortgage term. So I say, great job, Jennifer. Well, let's talk about if you add $200. I got another client, his name's David. Now he's a small business owner. He listens to my show every day. He always sends in comments, which I appreciate.

I encourage you to do the same thing. And he shared this testimony. He said this. He said Ralph, after implementing your advice about adding $200 monthly to my mortgage payment, I calculated that I'll save $52,000 in interest over the life of my loan. That's money I can use to expand my business and support my church's ministry.

Exactly, David. Nice work, $200 a month. That's 50 bucks a week. And think about that. On a 30-year mortgage, you're going to save 52,000 bucks. That's huge. Well, maybe you've got some money, you can make a big reach. Well, how about this? What if you added $500 a month? Like, let me tell you about my client, Sarah and John.

What they did was each of them got a raise at work. It was about a $500 and they decided to put that entire $500 raise towards their mortgage principal. And guess what? Think about this one. This one will rock your world. By that $500 extra month, they're going to pay off their home 12 years earlier. That's fantastic.

So that 30-year mortgage goes down by 12 years, but here's the greater part. They're going to save $103,000 in interest over the life of that loan. 103 grand. Think about it. That's college tuition for their children or their grandchildren, or that's a substantial boost to their retirement savings. So it sounds like making extra payments is smart, right?

But here's the crucial part. Listen to me very carefully. Before you make any decision about overpaying your mortgage, let's walk through what I call my financial freedom checklist. Get a pad and paper and write these things down. They'll also be in the show notes. This is what I call a financial freedom checklist.

Let's start first with your emergency fund. Do you have three to six months of expenses saved? Simple question. Yes or no. Is your income stable? Do you have a job that you're consistent with or you worried about you could be downsized or something like that. And then the third thing under emergency fund side is are you prepared for unexpected expenses?

Well, that's the whole point of an emergency fund. Isn't it? Do this financial freedom checklist. Think about your emergency fund status. Do you have three to six months of expenses saved? Is your income stable? And are you prepared for unexpected expenses? Then I think number two, you got to look at a debt assessment. Again, we've talked about this several times. Are you carrying any credit card debt?

Do you have personal loans? What about car loans or student loans? Look at those interest rates. If you're paying high interest on debts, do not pay extra on your mortgage until you pay those things off. The third tier to this. We've talked about this several times today as well. And that's retirement planning.

Ask yourself these questions. Are you maximizing your employer's 401(k) match? If you're not, do it, even if you have to build up to that. Don't pay extra on your mortgage to your least maximizing your employer's 401(k) match. Have you considered IRA contributions in general? Maybe you don't have a 401(k).

Maybe you're working a job that don't have it. Are you putting money into an IRA every year? If you're not, do that before you start putting money against your retirement, and then you got to ask yourself the big question. Is your retirement on track for your age? You got to ask yourself. At what and listen.

If you're 25 and you're putting 15% into your retirement and you've got extra money by all means, pay extra on your mortgage. But if you're 55 and your retirement savings aren't quite on track, I'm putting more money into retirement than I am paying down debt. Now, this is what a lot of people don't think about.

And that is ask yourself these questions about insurance. Insurance is a big portion of this. Do you have adequate life insurance? Is your disability insurance sufficient. Maybe you don't even have disability insurance. And have you reviewed your homeowners policy recently? You see, a lot of things go into this, but think about this.

If you don't have life insurance, maybe you'd be better off spending money on a term policy to give your family that protection, rather than putting that money extra on the mortgage. Maybe you don't have disability insurance, or maybe you can increase that at work. Go look at doing that. And then as always, I did a show about this a couple of weeks ago.

Look at your homeowner's policy and make sure you're paying for all the coverage you need. And see if you want to understand, if you don't hear me, this decision isn't just about mathematics. And that's the way it is the most the things I talk about, it's not just about the math. If it was just about the numbers, I give you an answer and say, Hey, go do it. But it's about finding peace in your financial journey while honoring God with your resources.

Now, this may be overwhelming for you, and you may want to book a consultation with me, and I can dig in deeper with your specific situation. And I can create a personalized plan that aligns with both your financial goals and your faith. So, if you want to do that, you go right to askralph.com, click book a call with Ralph.

Now I'm going to share some action steps that you can take today in just a few moments. But first I want to ask you this. It's Christmas time, or at least Christmas getting ready time. Are you losing sleep wondering how you'll afford everything on your holiday list this year? Are you tired of starting every new year buried under a mountain of holiday debt? Do you want to create magical Christmas memories without the financial stress that usually come with them? I think the answer's probably yes. Well, I'm going to give you something free and that is, I want you to discover peace of mind with my free surviving the holidays without going broke guide. I think that's pretty blunt. How can you survive the holidays without going broke. And in that guide, you'll learn a proven budget strategy that actually works. If you follow it, it will work. I'm going to share some smart shopping strategies to help you slash your costs. I'm going to tell you how to create magical memories without maxing out those credit cards.

I'm also going to teach you some tips that you can use for teaching kids gratitude in what I call this gimme more world. If you got little kids, you know exactly what I'm talking about. More, more, more. And most importantly, the centerpiece of this. Is how to keep faith and family at the center of your celebration.

Listen, don't let January's credit card bill steal your holiday joy. Download your free guide today. You get to it by going to askralphpodcast.com/christmas. And listen, get the guide and make this your most meaningful and affordable holiday season yet. Your stress-free holiday season starts here.

Go to askralphpodcast.com/christmas. Again, that's askralphpodcast.com/christmas. Now I promised you some action steps. And here we go. So before you make your decision about paying extra on your mortgage, number one, complete my financial freedom checklist. I just shared that with you. Go through each of those questions.

If you answered no to any of those, fix that area first, and then look at putting extra on your mortgage. Another thing I'm going to encourage you to do is use a mortgage calculator to run your specific numbers. I'm going to have a link on the show to a mortgage calculator you can use, and you can play with that.

You can put in your specific data, you can play with what if I add $50 a month? What if I had a hundred or 200 or 500? It will show you what the numbers mean for you. Cause I'm just giving you basic examples today. Your situation could be vastly different, but here's the deal. If you're doing all the things right on the financial freedom checklist and you can afford to pay extra on your mortgage, bottom line answer is do it.

Number three thing. I always talk about this. Always pray for wisdom and guidance. Ask God. Listen, what should I do here? Like Maria, your question today was all about that. You know, I'm praying about this. I want to be a good steward. And then finally, the last thing I want to say is maybe you might want to book a personal consultation where we can review your entire financial picture together.

Sometimes you just need extra help. Now tomorrow, we're going to tackle another crucial topic for homeowners and that's title insurance and why you need it. A lot of people don't understand what that is. They go to settlement, they see this line item, title insurance, but they have no clue what it is. So you don't want to miss that essential information that could protect your biggest investment.

And we just talked about mortgages, for most people your house is your biggest investment. So you want to make sure it's protected. Now remember my passion is to help you achieve financial success. I truly want to see you live out your dreams. I want to see you grow in your faith. And I know together we can master your finances from that Christian perspective. So as I always end the show, I encourage you stay financially savvy, and God bless you abundantly.

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00:24:06

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