Trying To Convince The Spouse
How can Clay convince his spouse that it's smart to pay off the house?
QUESTION: Clay is getting engaged soon and they are both in a good financial position. She doesn’t want to pay off the mortgage. She owes $120,000 at 6% on her home and they make about $150,000 a year. How does he convince her that it’s good to do? Dave beats down her 2 biggest arguments here to make his point.
ANSWER: She’s bought off on the cultural lie that you need to keep your mortgage. It’s a pretty simple thing. I was trained and taught to not pay off the house because you get the tax savings and can invest the money at a better interest rate.
Let’s work through the income tax deduction. She’s paying $7,200 in interest. If you make $147,200 and wrote off $7,200 for the interest, you would pay taxes on $140,000. If she pays the house off and has no tax relief, she’ll pay taxes on $147,200 instead of $140,000. That extra tax would be about $2,500. She’s arguing that it’s better to send $7,200 to the mortgage company to keep from sending $2,500 to the government.
If I invest the money at 12% and you borrow at 6%, you have to pay taxes on what you make, and when you adjust for risk you really don’t make much. If you had a big house, would you borrow against it to invest? You wouldn’t because you take risk into account. You have to reach a point in these discussions where she hears you and that she’s not the only one claiming to be bright. Neither one of these arguments that she made holds water.