Being unsure whether to pay off your mortgage or not is a good problem to have. It means you have significant savings and have afforded yourself some choices. While the idea of being debt-free is appealing to many, there are also compelling reasons to keep your mortgage. Let’s explore both sides of the debate to help you make an informed decision.
The Case for Paying Off Your Mortgage
1. Peace of Mind
There is a certain peace of mind that comes with knowing your home is fully paid off. It also offers a sense of accomplishment as you’ve reached the end of a major financial commitment.
2. Return on Investment
Paying off your mortgage offers a return equivalent to your mortgage interest rate. For example, if your mortgage rate is 4%, you’re essentially getting a 4% return as you’re now done with that obligation.
3. Reducing Financial Risk
By eliminating your mortgage, you reduce the risk of financial strain if your income decreases or if you face unexpected expenses. This can be particularly important for those approaching retirement.
4. Simplified Finances
Paying off your mortgage simplifies your financial life. With one less bill to worry about, budgeting becomes more straightforward, and you free up mental bandwidth to focus on other financial goals.
The Case for Keeping Your Mortgage
1. Opportunity for Higher Returns
One of the primary arguments against paying off your mortgage is the potential for higher returns elsewhere. Historically, the stock market has delivered average annual returns that exceed most mortgage interest rates.
2. Maintaining Liquidity
Paying off your mortgage ties up a significant amount of money in an illiquid asset. If you need access to cash for an emergency or investment opportunity, having funds invested in accessible accounts can be very helpful.
3. Tax Benefits
For those who itemize deductions, mortgage interest can be tax-deductible, reducing the overall cost of your loan. Although the tax benefits of mortgage interest have decreased with recent changes in tax laws, they are still worth pursuing.
4. Low Interest Rates
If you locked into a low-interest rate, you might want to hang on to it. Rather than paying off a low-rate mortgage, you might prefer to use your money for other investments, lifestyle upgrades, or even keeping it in savings for future needs.
Carrying a Mortgage into Retirement
Once you stop working, will you still have to make a monthly mortgage payment? Carrying mortgage debt during retirement may be a heavier burden than you’ll want to bear. Anyone considering refinancing or taking on a new mortgage shortly before retirement should certainly think about the following items.
A mortgage payment will significantly increase your monthly living expenses.
Without having to make a mortgage payment, you may be able to comfortably live on much less during retirement. With a mortgage payment, it may also take away from other goals in retirement, like traveling, funding grandkids education, or charitable giving.
You may lose financial flexibility.
Having a large fixed monthly cost is restrictive at any age, but it could be a bigger problem when you’re not receiving a regular paycheck. You may be forced to sell investments at inopportune times (like during a 20% market correction) in order to make mortgage payments.
The mortgage interest income tax deduction will be less over time.
You pay a lot more in interest in year 5 of a loan than you do in year 20. As a result, with each mortgage payment you make, a larger percentage is applied to principal and a smaller percentage to interest. Carrying mortgage debt into retirement could limit flexibility and potential retirement goals. Taking steps to be mortgage debt free could provide that increased flexibility to make retirement a more enjoyable experience.
Gain insights from a professional
Ultimately, the decision to pay off your mortgage early depends on your individual financial situation, goals, and comfort level with debt. If your primary goal is financial security and peace of mind, paying off your mortgage might be the right choice for you. However, if you are comfortable managing debt and see potential for higher returns through investing, keeping your mortgage may make more sense.
Our financial professionals are here to help you create a financial plan to address questions like paying off your mortgage. Book a conversation with our team to discuss a plan for your mortgage and overall financial goals.
