Should you pay off your mortgage early? YFP Co-Founder & CEO, Tim Ulbrich, PharmD, unpacks the math, emotions, and big-picture factors in the mortgage payoff debate—plus 5 reasons when it may or may not make sense to pay extra on your mortgage.
Episode Summary
Should you pay off your mortgage early? It’s a question that comes up often in personal finance—and the answer isn’t always as straightforward as the math suggests.
In this episode, YFP Co-Founder and CEO Tim Ulbrich, PharmD, unpacks the numbers, the emotions, and the bigger picture behind this important decision. Using a real-life example and the YFP Early Payoff Calculator, Tim walks through how even small extra payments can shave years off your loan term and save you thousands in interest.
But here’s the twist: despite the financial benefits, Tim has personally decided not to pay off his mortgage early. He shares his thought process along with five compelling reasons why making extra mortgage payments might make sense for others.
Whether you’re deep into your mortgage or just getting started, this episode will help you evaluate your options and make a decision that aligns with your long-term goals.
Key Points from the Episode
- 00:00 Introduction and Episode Overview
- 00:12 The Big Question: Should You Pay Off Your Mortgage Early?
- 01:41 Factors to Consider: Math and Emotions
- 03:59 Using the YFP Early Payoff Calculator
- 04:45 Real-Life Example: Mortgage Payoff Scenarios
- 08:00 Opportunity Cost and Financial Decisions
- 10:29 Personal Decision: Why I’m Not Paying Off My Mortgage Early
- 11:39 Five Reasons to Consider Paying Extra on Your Mortgage
- 22:00 Listener Engagement and Conclusion
Episode Highlights
“ But as with many financial decisions that we make, there’s the math, there’s the emotions, and there are other goals that we have to consider in the financial plan. We don’t want to fall into the trap of making decisions in a silo.” – Tim Ulbrich [3:46]
“ We have to zoom out and always ask ourselves, what is the opportunity cost of making that financial decision of extra payments? Because anytime you make a financial decision, there’s always an opportunity cost that we have to weigh that against, and we have to consider the math of that opportunity cost as well as the emotions.” – Tim Ulbrich [8:04]
“ The emotional relief here is what we’re talking about where some people say, ‘Hey, that’s important to me. I want head into retirement with no mortgage,’ and that might be a trade off that’s worth considering.” – Tim Ulbrich [19:35]
Mentioned in Today’s Episode
Episode Transcript
Tim Ulbrich: Hey guys, so today I’m tackling a common question that I get and one that I’ve thought a lot about in my own financial situation, and admittedly one that I’ve gone back and forth on throughout the years, which is, should I pay off the house early by making extra mortgage payments? So, what’s the answer, right?
Tim Ulbrich: As I alluded to in the introduction, is it really depends. It depends on a lot of different factors in one’s personal financial situation, and we’re gonna unpack those individual factors today. And there’s both mathematical considerations as there always is, and there’s emotional considerations that we have to factor in when we’re making this decision.
Tim Ulbrich: I think sometimes in personal finance when it comes to topics like paying off debt versus investing, right? These, should I [00:01:00] do this or should I do that? Sometimes we can make these black and white when in fact there are a lot of iterations that we have to consider. And it’s my partner to make often says on the show, you are a unique snowflake.
Tim Ulbrich: Your financial situation is unique, right? And as we’re gonna talk about today, when it comes to paying off the house early, we have to factor in a lot of different things. Whether it be the interest rate, other goals that are going on, what’s the term of the loan? What’s the purchase price of the the house?
Tim Ulbrich: How much did you put as a down payment? All of these things are gonna impact, along with the emotions, how we’re going to approach this decision, and there is no one right answer, right? Because of everyone’s emotions can be different because of how the math can be different based on your individual situation.
Tim Ulbrich: So let’s start with the math. Okay. The, the math doesn’t lie. Making extra payments on your mortgage can cut off a significant amount of time from. [00:02:00] The amount of years you’re gonna be paying off this debt, right? From the term of the loan, especially if you have a 30 year term loan, which is probably for most listening, uh, is is the case.
Tim Ulbrich: Some of you might have a 20 or a 15, 20, not so common. Maybe more. More so on the 15 year side. And we’ve probably all heard something along the lines of, Hey, if you make an extra payment per year, if you make one extra payment per year, it can cut off so many years, right? You might hear four years, five years, six years, seven years off your mortgage.
Tim Ulbrich: We hear that and we’re like, wow, if I could have this paid off in 23, 24, 25 years instead of 30 years, that is significant, right? But as with many financial decisions that we make, there’s the math, there’s the emotions, and there’s other I. Goals that we have to consider in the financial plan. We, we don’t wanna fall into the trap of making decisions in a silo.
Tim Ulbrich: Now, if you use the YFP Early Payoff calculator, we’ll, we’ll make a link to that in our show notes. If you’re not already aware, if you go to our homepage, your financial pharmacist.com, [00:03:00] you’ll see a section that we have a bunch of different calculators that you can use in your own financial plan. And one of those is an early payoff calculator.
Tim Ulbrich: You can use that to run some numbers on your own, and whether it’s a mortgage like we’re talking about today, whether it’s student loans, whether it’s a car loan, any debt that you have, you can run some simulations to say, Hey, if I make an extra lump sum payment, or I add to my monthly payment, or whatever is the frequency of your payment, you can see what that will change in terms of the, the loan term, when you’ll have that paid off, as well as how much interest you’ll say save by making extra payments.
Tim Ulbrich: So let’s, let’s look at an example. If, let’s say that you bought a $350,000 house. Now I know for those of you that heard that, and you’re on the west coast, you’re in the northeast, you’re in the dc, Virginia area, you’re like, Tim, you’re out of touch. You live in Ohio, right? I get it. Walk, walk with me through this example.
Tim Ulbrich: So let’s say you bought a 350,000 house back in 2018, and between the down payment and about [00:04:00] seven years worth of payments that you’ve been making. You now have a balance due of $230,000. Okay? So you bought a $350,000 house. That was the original, uh, mortgage that you have. We had a little bit of a down payment.
Tim Ulbrich: You’ve been making payments over seven years, and now we’ve got a balance due of 233, 200 $30,000. Now, if we assume a 3% 30 year fixed interest rate, now some of you’re like, Tim, what in what world does a 3% interest rate? Where does that come from? Well before the pandemic, that was a pretty common interest rate and a lot of you listening probably locked in your mortgage at that rate.
Tim Ulbrich: And that’s why we have in part, uh, a challenge for many first time home buyers being able to get into homes because existing home buyers with low interest rates don’t wanna move out of their house and give up that interest rate. Now stay with me because if you’re in today’s market of buying a home or you’ve recently bought a home, you know that those days of 3% are long gone.
Tim Ulbrich: And now we’re looking at six to 7%. But stay with me just for this example in [00:05:00] math. So again, $350,000 house 2018. Between the down payment and some payments that we make, we now owe $230,000 and we have a 3% 30 year fixed interest rate. Now, if you were to make an extra $100 per month. Payment on top of the minimum payment that’s due at the end of the loan.
Tim Ulbrich: If we fast forward to when it’s all said and done, you would save about $11,000 of interest and pay off that house about 2.6 years early. Okay, so we turn a 30 year fixed. Loan into just over 27 years. Okay? That’s an extra a hundred dollars a month. If you were to put an extra $200 per month on top of the minimum payment, you would save about $19,000 of interest.
Tim Ulbrich: And now we’re gonna cut off about 4.6 years. Pretty significant, right? 30 years. Now we’re looking at about 25 to 26 years. If you put an extra $300 a month. Or $3,600 a year on top of [00:06:00] the minimum payment, that would now save $26,000 of interest, and we’d pay it off about 6.3 years early. And finally, an extra $400 per month, $4,800 per year.
Tim Ulbrich: We’d save about $31,000 of interest, and that would pay off about 7.6 years early again. 3% interest rate, right? So you get the point extra payments, and you can run these O your own numbers. Again, using the YFP early payoff calculator, we’ll link to that in the show notes, but extra payments, even small, relatively small, a hundred dollars a month.
Tim Ulbrich: Obviously. As that goes up, we see greater savings can lead to significant savings, both in the interest. That we’re gonna save as well as the shaving of some years off of the mortgage. Now if we just stop there, right, and we zoom in onto this one area of the financial plan, and we look at the math. If we make a decision only on that information, I think we’re making a mistake.
Tim Ulbrich: I. Because even if you get to the same decision, we have to zoom out and always ask ourselves, [00:07:00] what is the opportunity cost of making that financial decision of extra payments? Because anytime you make a financial decision, there’s always an opportunity cost that we have to weigh that against, and we have to consider the math of that opportunity cost as well as the emotions.
Tim Ulbrich: That are involved in both the debt repayment here, we’re talking about extra debt on the mortgage and what else you could do with those funds, right? Because you could always do something else with the funds. And that’s true on the other side of the coin as well, if you were to, instead of paying extra on your mortgage, you were to spend that money, let’s say on life experiences, travel, vacation, whatever, there’s an opportunity cost that we have to consider there, uh, as well.
Tim Ulbrich: So the math is intriguing, right? But is it the right move? Again, it, it depends. It depends on a lot of variables. You know, what’s the balance of, of the mortgage, you know, was it a $350,000 house with two 30 left like you saw in this example? Or was it a million dollar home that has $950,000 left on the [00:08:00] loan?
Tim Ulbrich: What’s the interest rate? 3% versus today’s interest rate? Very different outcomes that we might get in terms of the opportunity cost question that I just posed. I’ll share here in, in, in a little bit that for us, in our own situation, when I look at 3% debt, and this is not advice of what you should or shouldn’t do, I look at that and say, Hey, I’m not ready to make extra payments on that because I.
Tim Ulbrich: We could have those dollars working elsewhere for us in the financial plan. Other variables. What are your feelings towards the debt? No right or wrong answer. There are some folks that regardless of the interest rate, there’s an aversion to the debt. And I’m not here to tell you that you’re right or wrong with that.
Tim Ulbrich: We have to acknowledge and understand what is the emotion that we feel towards the debt. What is the monthly cash flow look like? How much margin do we have in the budget? And if we were to put extra towards a mortgage payment. Is there still extra or is there not still extra to do? Other goals and other things that we’re trying to work on?
Tim Ulbrich: And of course, what else is going on in the [00:09:00] financial plan? We know that we’re not only focused on paying off a mortgage. What else is going on? Is there, is there student loan debt? Is there other debt such as credit card debt? Where are we at with the emergency fund? How are we doing with the retirement savings?
Tim Ulbrich: How are we doing with kids’ college savings? What about our experience? Types of things that are important in our financial plan, vacation, travel, et cetera. All of these things we have to look at together. As we try to evaluate how we’re gonna make a decision in one part of the financial plan now personally.
Tim Ulbrich: I’ve decided, we’ve decided, Jess and I, that we’re not going to be paying off the mortgage early. At least not yet. Now why? You, you, you probably can figure out why I just shared, you know, an example that is also true for us. We happen to buy our home in 2018, and I think at the time we bought it at 4.625, I think was the interest rate.
Tim Ulbrich: And we refinanced that in 2019 or 2020 down to 3%. So when I look at a 30 year fixed rate loan at 3%. To me the the math supports making other [00:10:00] financial moves in lieu of making extra mortgage payment. Now my interest rate, our interest rate and how we feel about that, it may be different than your situation and that’s okay.
Tim Ulbrich: Right? That’s okay. So I wanna walk through with that background of mine in mind. I wanna walk through five reasons. When it may make sense to pay extra on your debt, and of course with each one of these, you could apply the opposite to where it may not make sense to pay extra on your debt. So we’ll walk through five different reasons that I want you to be thinking through.
Tim Ulbrich: So number one is aversion to debt or the emotions surrounding the debt, right? All debt is not equal, and everyone’s debt tolerance is different. And as I’ve highlighted a couple times now, and I’m gonna continue to reiterate, the financial plan is not just about the math. Of course, we have to consider the math, we have to weigh the opportunity costs.
Tim Ulbrich: But if we make a decision. It flies in the face of considering the emotions, I think we’re missing, at [00:11:00] least in terms of looking at that decision holistically. And for some, the aversion to debt is strong enough that despite all the numbers screaming, don’t do it. It still might be the right move. In addition to peace of mind, there’s a tangible benefit that can come from a feeling of momentum and progress, and the calculator doesn’t yet have a function.
Tim Ulbrich: To factor in peace of mind and momentum, right? To factor in more the emotional side of this equation. And so I, I joke about that, but in all reality, that’s how we have to think about it. What, what is the mathematical opportunity cost, right? If we use my example of a 3% 30 or fixed rate loan, if I put an extra $200 per month onto that mortgage payment.
Tim Ulbrich: The opportunity cost, just as one example is that I could put $200 a month, let’s say in a Roth IRA or in a 401k or in another type of investment, and we can model that out and mathematically using historical rate of returns, it’s gonna [00:12:00] show that that money invested will be any savings I’m gonna have on the debt repayment.
Tim Ulbrich: However, if I were to have a strong aversion to debt, how do you factor that in, right? We have to be able to weigh that end. I think it would be cool if we had a calculator that could make some assumptions and adjustments accordingly. The number two reason when it may not make sense to pay on your mortgage, of course, would relate to the interest rate, right?
Tim Ulbrich: Having low interest rates. I mentioned that in our example the 3%, whether fixed or variable higher interest rates on homes have been around long enough that those that are holding onto a 3% mortgage are starting to sound a little bit old and and out of touch with reality. And again, mathematically speaking, the decision and opportunity cost of paying off 3% debt versus 7% debt, as we look at today’s interest rate environment is very, very different.
Tim Ulbrich: That said, one should also consider whether or not they’ll be able to refinance in the future [00:13:00] before you pay down that debt, right? We don’t know where interest rates are gonna go, but if you were to buy a home today, in today’s 7% environment. We may not stay at a 7%, we will probably not stay at a 7% environment forever.
Tim Ulbrich: May go up more. It could may go down more. I think probably it will, probably not to 3%, but I think we’ll probably see those come down. So there is an opportunity to refinance, meaning that the way you look at it today at that rate and how you pay down that debt, that might look different if you’re able to refi, say from a 7% down to a 5% or four point a half percent in the future.
Tim Ulbrich: So the higher the interest rate, the more the math favors extra payments. The less convincing the argument becomes that these dollars could be used elsewhere in the financial plan. I say this all the time with student loans, right? Not all student loans are created equal. If you have a private student loan that’s at 8, 9, 10, 11, 12%, we might look at that very differently than you would have say, a federal loan at four or 5% is one example.
Tim Ulbrich: [00:14:00] So not all loans are created equal and the interest rate, and therefore the opportunity cost decision changes. As the interest rate, uh, changes for that loan. Number three relates to building up equity to have options. Because mortgages are front loaded with interest. For those of you that have a have a home, you know this all too well.
Tim Ulbrich: Hopefully you’ve looked at the amateurization table before. If not, you should pull a statement and check it out. But essentially, these loans are front loaded, meaning that the majority of your payment upfront is going toward interest and every payment that you make a little bit more might just be a few dollars, but a little bit more per month is going towards principal or the original cost of borrowing and a little bit less is going towards interest.
Tim Ulbrich: Eventually you start to flip that payment where a majority goes toward principal and a minority goes toward interest right as you pay off the debt. So because the mortgages are front loaded with interest, if you had a very small down payment. There is a potential that you could find [00:15:00] yourself in an equity buying.
Tim Ulbrich: Well, what do I mean by that? When you have a very small down payment, right? There are loans out there, we talk about them on the show here, they certainly can be a good fit, such as the pharmacist home loan, where you may have 3% down. Some doctor loans out there might even be a little bit less. With a small down payment, there’s always the potential risk of the market.
Tim Ulbrich: Downturn, meaning that house values go the opposite direction of what they have been doing, and that could leave someone what’s known as being underwater on a loan, right? Owing more than the home is worth. Now I think in today’s market that’s probably not likely. Every micro market is very different, but it’s always a possibility.
Tim Ulbrich: And as long as you stay in the market long enough for home values to do what they’ve done historically, that risk is, is fairly small, and that’s why we can often feel comfortable using some of those products out there that have a lower down payment. The other risk to consider is if you find yourself unexpectedly moving, so you buy, you think you’re gonna be there for a long [00:16:00] time.
Tim Ulbrich: Job, family, something comes up, you move one or two years later, and you don’t have enough equity in the home to cover the transaction costs and the down payment on the new home. Now we have ourselves in a potential cash bind, right? And we have to kind of figure that out and work through it. One argument to pay off your home early would be is that as you’re making extra payments, you’re building up the amount of equity that you have in the home, so that if you were to have to move or sell the home, you can be able to use that equity to help you, whether it be with a transaction cost, or putting a new down payment on the home that you move into.
Tim Ulbrich: Now that said, there’s another side of this coin, right? You could also argue that any extra payments that you make. To build up more equity, you could simply just set aside in an investment account or even more conservative, something like a high yield savings account for that purpose if it were to arise, if you were to move.
Tim Ulbrich: And that certainly does make sense and can afford you more [00:17:00] flexibility. But behaviorally, we all know that it’s hard to hold muddy aside for a maybe situation. When you have other expenses that are in front of you right now, of today, right? So equity and paying down your mortgage early to build up equity, it’s kind of that forced position that unless you have a debt vehicle where you’re drawing off of that equity, something like a HELOC for example, it’s kind of there and you’re not thinking about it, versus money that would be sitting in a high-yield savings account, so that that’s the third potential option where it might make sense to make extra payments, maybe at a low down payment.
Tim Ulbrich: You’re trying to build up your equity position in the home. Number four is working towards a milestone, working towards a milestone. So similar to number one, right? Which was that aversion I talked to, to that more, that emotional component. This one working towards a milestone is more about peace of mind than it is the numbers.
Tim Ulbrich: So the most common example I I hear as it relates to this one, working towards a milestone would be entering [00:18:00] retirement without a mortgage payment. This concept of, Hey, I wanna get to retirement and I don’t wanna have to think about this mortgage payment, even if there’s. Funds that are available throughout the retirement plan when you build your retirement paycheck, even if that were to be the case, there’s this mental clarity that many people describe of, Hey, I don’t wanna have a mortgage when I enter retirement.
Tim Ulbrich: So even when the math might say, Hey, you could invest that extra cash, you could do other things, you might be able to get better returns. The emotional relief here is what we’re talking about where some people say, Hey, that that’s important to me. I wanna head into retirement with no mortgage, and that might be a trade off that’s worth considering.
Tim Ulbrich: I. It’s a personal decision, obviously, as, as all of this is for many, but it aligns with the larger goal of financial freedom and security in retirement. And again, back to the, the joke I made about, hey, where do we hit the function on the calculator to add the emotional piece? This would be another example of that.
Tim Ulbrich: Number five, on this list, as we look at some reasons, it [00:19:00] may make sense, and again, the opposite could be true or it may not make sense. Number five is, are your other goals on track? And I mentioned this earlier, but often when we talk about any part of the financial plan here, we’re talking about paying off your house early.
Tim Ulbrich: It could be should I pay extra on my student loan debt? It could be, should I put more towards my investment and retirement? Should I put more in my kids’ 5 29 account? Any one of these we, we can get into the trap and tendency of thinking in a silo. We have to zoom out to look at all of the other pieces of the financial puzzle.
Tim Ulbrich: What else is going on with the financial plan? And again, as we think about opportunity costs, how might those dollars be used elsewhere? Even if we still get to the same decision, yes, I want to, or I don’t want to pay extra on my mortgage. We wanna know that we’ve considered it in the context of other things that are happening in the financial plan.
Tim Ulbrich: So again. It could be emergency fund, it could be student loans, could be kids’ college, could be retirement. All these other things that we’re trying to prioritize and balance. [00:20:00] And if you’re listening and you’re thinking about this decision, should I pay extra on my mortgage or not? If you’re someone who is checking all the boxes, right?
Tim Ulbrich: You’ve built a strong foundation, you’re saving for retirement, you’re on track, kids’ college funding, all the goals are moving where you want them to move and you have extra cash available to pay off extra or put extra towards the mortgage. That’s a very different conversation. Someone who’s asking themselves, Hey, should I pay extra on the mortgage?
Tim Ulbrich: And those other boxes are not checked. So the fifth item we’re looking at here today is what else is going on in the financial plan? Are we on track? Essentially, are we not? And then how we make this decision, whether we’re on track or whether or not might sway us as to whether or not those dollars could be used elsewhere.
Tim Ulbrich: So there you have it, five different factors to think about, or five reasons where it may make sense to pay extra on your mortgage. And I’m really curious to hear your thoughts. So for those that are currently making extra payments, I know several people that might. [00:21:00] Start with a 30 year term and go down to a 15 year term or leave it at a 30, but pay extra on the payments.
Tim Ulbrich: Why have you made that decision? What was it about your personal situation that led you down the path to making extra mortgage payments? Was it the math? Was it feelings? Was it something else? A milestone like I talked about on today’s show, for those that are not paying extra on your mortgage, why have you made that decision?
Tim Ulbrich: Why have you made the decision to let your debt and the term of the loan go out to the life of the loan and focus on other financial goals? Love to hear from you. Send us an email [email protected]. You can also record a voice [email protected] slash ask yfp. Well, thanks so much for joining me today and listening to this week’s episode of the YP Podcast.
Tim Ulbrich: If you like what you heard, do us a favor and leave us a rating and review on Apple Podcasts or Google reviews, which will help other pharmacists find the show. And finally, an important reminder that the content in this podcast is [00:22:00] provided for informational purposes only and should not be relied on.
Tim Ulbrich: For investment or any other advice, information in the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related product. For more information on this, you can visit your financial pharmacist.com/disclaimer. Thanks so much for listening.
Tim Ulbrich: Have a great rest of your week.
[END]
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