Most of us that live in our home have a mortgage. The decision as to whether to use available funds for investing or paying down your mortgage is a question that is often asked.
That is not a simple question. The answer to this question is different depending on your situation should be based on a number of factors:
- The interest rate on your mortgage.
- Expected investment earnings, based on your risk tolerance and investment horizon.
- Your income tax bracket.
- If any large purchases are anticipated in the near future.
- Balance in your emergency fund.
- Amount of your retirement savings
Make sure you take all of the above into consideration before using any available funds to pay down your mortgage.
Taking out a lump sum from your 401(k) to pay off a mortgage is a particularly bad idea. Accelerating payment on your mortgage at the expense of maxing out your 401(k) tax-advantaged retirement account is almost always a mistake.
However, if you decide not to pay off your mortgage, you won’t be alone, says Jennie Phipps in a recent article on Bankrate.com. In 2004, 32 percent of households headed by someone age 65 to 74 were carrying home mortgage debt and nearly 20 percent of households headed by those 75 and older had a mortgage, according to the triennial Federal Reserve Survey of Consumer Finances conducted in 2004. About 25 percent of those of any age who considered themselves retired had a mortgage.
All that said, there are benefits to paying off your mortgage.
- It’s not a bad idea to pay off your mortgage prematurely, if you can swing adding an extra payment every month toward the principal without sacrificing your retirement savings. That might be the ideal approach.
- If you want to leave your home to your heirs, do them a favor and pay off the mortgage. Otherwise, they may be faced with selling the house whether they want to or not.
- Make a sure bet. Gillette Edmunds, author of “Retire on the House,” a book about real estate investing, pooh-poohs the notion that it is smarter to keep a mortgage and invest at a higher interest rate. “The problem is that mortgage interest is a sure thing and the investment isn’t,” he says. “You could lose everything you invested and still have to pay the mortgage.”
- Peace of mind. For many people, paying off the mortgage has intangible advantages. “You would never believe how fabulous and freeing it feels to pay off a mortgage,” Garrett says. “The psychological benefits are enormous.”
- If a reverse mortgage is your financial fallback position and you owe money on your home, you must take at least that amount as a lump sum advance at closing and use it to pay off your debt at that time. Therefore, having a paid-off mortgage increases the amount of cash available to you in a single lump sum, credit line or monthly advance.
So the answer is different for everyone. If you are thinking about paying off your mortgage, call us at (760) 321-5305 to help you weigh all of the pros and cons before doing so.