Wouldn't it be nice to pay off your mortgage? Emotionally, the answer is probably yes. If we take a look at the numbers, however, it might not be as nice as it seems. One of the most common questions we get from our clients, especially those approaching retirement, is whether or not to pay off their mortgage. The answer, as with most complex questions, is: it depends. In this article, I will explore the arguments for paying off your home as well as the arguments against it. There is no simple answer, but hopefully we can guide you down the right path.
The Argument For Paying Off Your Mortgage
- Peace of Mind - Owing hundreds of thousands of dollars can be daunting. Paying off your mortgage can increase your peace of mind by knowing you are not in debt to the bank.
- Easier Monthly Budgeting - If you pay off your mortgage, you will no longer have a monthly mortgage payment. This can free up room in your budgets that you can either save for the future or spend on new things.
- Predictable Rate of Return - When you pay off your mortgage, you are essentially locking in a growth rate of that money equal to your mortgage rate. While mortgage rates are typically low when compared to investment returns, it is more predictable. If you are a conservative investor that prefers lower guaranteed rates to higher non-guaranteed rates, paying your home off could be a good strategy.
- Diminishing Tax Benefits - While mortgage interest is deductible, recent changes to the tax laws have made these deductions less impactful for most homeowners.
The Argument Against Paying Off Your Mortgage
- Potential for Higher Returns & The Law of Interest Rates - As I mentioned above, when you pay off your mortgage you are essentially locking in a growth rate of that money equal to your mortgage rate. However, the "Law of Interest Rates" tells us that, from a numbers perspective, we should allocate our money to the areas of our plan with the highest interest rates. Typically, mortgage rates are relatively low (2%-5%). If you have outstanding high interest credit card debt (15%+), then your money would be better off going toward paying off the credit card then paying off the mortgage. Over the long run, stock market investments can earn high returns (5%-10%). If you have a long time horizon and are willing to ride out the ups and downs of the market, you may be better off investing your money instead of paying off your home early.
- Maintain Liquidity - When you pay off your mortgage, you give up some of your liquidity or easily accessible money. If you have plenty of liquid assets, this may not be a concern. However, if paying off your mortgage will leave you with less than substantial liquid assets, it may not be a good idea.
- Mortgage Interest Tax Deductions - Mortgage interest can be deducted from your taxes. While this should not be the only reason you maintain your mortgage, it is an additional factor.
The Bottom Line
So what is the right decision for you? In my opinion, the right decision for each individual is a compromise between what your emotions tell you to do and what the numbers tell you to do. Only you know how you feel about your mortgage. Your financial advisor can help you calculate your numbers.
Making the decision to pay off your mortgage comes down to personal preference but engaging a professional can help you make the most well-informed decision possible. If you need to look at your numbers or discuss the possibility of paying off your mortgage, schedule a meeting with either myself or Tori.
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