Should You Pay Off The Mortgage?

Thoughtful article by financial journalist Robyn A. Friedman on whether it makes sense to pay off the mortgage as you approach retirement.

Debt-free peace of mind

Many of our clients have paid off their mortgage entirely, usually because they wanted the peace of mind of being debt-free. When we sit down to review their retirement projections (as we did today with a client), we treat the equity in their home as “Plan B.”

You can’t eat it, you can’t spend it, but if you really get down to your last dollar, you can sell the home and then use those funds to keep you afloat for several more years. Think of it like the reserve gas tank on your car. (I’m ignoring reverse mortgage for now. Yes, I know they exist, but let’s leave them for another day).

All about the spread

If you’re a conservative investor, choosing to invest in CDs, bonds and only a smattering of equities, then you should strongly consider paying off the mortgage.  We absolutely agree with the quote in the article: “If you’re investing in certificates of deposit earning an interest rate of 2%, it makes more sense to use that money to pay off your mortgage.

It’s all about the spread. Why borrow at 5%, for example, assuming that’s your mortgage rate, and lend that money out at 2%, which is what you are doing when you invest in CDs? You’re losing 3% on the transaction, so in most circumstances it makes more sense to go debt-free.

Other people’s money

But let’s say the spread is positive. You’ve locked in an awesome 3 to 4% mortgage rate, having borrowed when rates were at their lows. While you have clearly built up equity in your home, much of your net worth is invested in growth assets that, over time, are earning more than your mortgage costs (this is what is often called a good use of OPM, or Other People’s Money).

You’re a smart investor, borrowing low and investing that money in more rewarding ways. And, you’re taking advantage of the tax breaks available to homeowners. I’m not saying everyone should run out and get a big mortgage. But for more aggressive and numbers-oriented investors, mortgages are effective financial tools that can be safely and profitably maintained even while in retirement.

Final thoughts

The article touches on a few big no-no’s that we get asked about fairly often. No, it’s not a good idea to take money out of your retirement accounts to pay down your mortgage. And if you’re behind in saving for retirement, it doesn’t make sense to take money out of almost any account to pay down the mortgage (you’ll need that money to cover living expenses).

Remember that once all that money is in your house, it’s no longer cheap or easy to get it out, so think several times before dumping a load of money in an asset you can’t eat. (Living in a gingerbread house? Permission to break the rules!).

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