Should You Pay Off Your Mortgage?
When does it make sense to pay off your mortgage?
There’s a lot to consider when thinking about paying off your mortgage. Your home is likely one of the most significant financial investments you’ll make in your lifetime, but it’s also an emotional one. As you near retirement, you may start to wonder if you’ll be better off without the burden of a mortgage – but that’s not always the case.
You can watch the video on this topic above, or to listen to the podcast episode, hit play below.
Read on to discover why you need to think about cash flow, alternative resources to cash savings, and if it’s a good choice for you to pay off your mortgage.
Why would you pay off your mortgage?
Before you make a decision about paying off your home, we want you to consider why you’d like to do this.
Perhaps it’s a life goal of yours to pay off your mortgage. Many of our clients dream of living mortgage-free, and it’s our job to help them think through this.
But there’s another school of thought that takes a more strategic approach to mortgage payments. This is where you focus less on paying it off in full and more on paying it off in a way that benefits you financially. For example, if you have a low-interest rate on your mortgage, your savings may be able to offset the interest if they’re invested well, e.g., in the stock market or even a CD.
How would you pay off your mortgage?
In order to pay off your mortgage, you have to have the funds. Think about where these are and where it makes sense to pull the money from.
If you have savings sitting in your bank account, it’s a good idea to use these to pay off your mortgage. Cash in the bank won’t be performing very well as interest rates are currently low – almost zero. There are also very few tax issues with this type of account, making it a simple choice.
However, if your savings are in an IRA, and you’d prefer to use this to pay off your mortgage, then you will have to think about the tax impact. IRA money is fully taxable. So, if you want to take $100,000 out of your IRA to pay off your mortgage, you’ll also have to factor tax onto that. You could end up paying an extra $20,000-$25,000 in taxes alone.
As you head into retirement, you want to make sure you have as much money as possible. So, spending thousands of dollars in tax probably isn’t the best decision. While you may feel emotionally inclined to pay off your mortgage, it’s vital to look at how it’ll impact your finances as a whole.
Understanding your cash flow
Say you owe $100,000 on your low-interest rate mortgage. You have enough in your savings to pay this off, but is this the right decision? You want to know if you should use your savings to pay off your mortgage or if you should invest it.
If you choose to invest it, you could get a rate of return anywhere between 6-10%. If your mortgage interest rate is only 2-3%, then you may be tempted to invest your savings instead. But this decision isn’t suitable for everyone.
One of the things we look at is your principal and interest payment on your remaining mortgage balance. Your monthly payments will have been calculated on a much larger sum, so one option is refinancing. However, it’s worth noting that this comes with a cost.
Let’s go back to the example. If you owe $100,000, you may be paying roughly $1,250 per month or $15,000 a year off your balance. This is 15%, which is an incredibly high rate. It would be extremely unlikely for you to earn 15% on any other account. In this case, you’ll have an instant positive cash flow of $15,000 per year by paying off your mortgage.
We understand that this can be hard to visualize for your specific situation. So, if you’d like to see a cash flow analysis on your current mortgage, we’d be happy to calculate this for you. Get in touch with us or book a complimentary call.
Should you use all of your savings to pay off your mortgage?
In a scenario where you have just enough saved to pay off your mortgage (and it makes financial sense to do so), you may feel uncomfortable about having little to no savings left. It can be a lot to stomach watching your account drop from $105,000 to $5,000!
A home equity line of credit can be a suitable solution here. This works in a similar way to a credit card, but the interest rate is typically very, very low. It also gives you access to cash that you can draw on, if you need. So, while you may only have $5,000 in your savings, a home equity line of credit allows you to access much larger sums.
If you do end up needing to use, say, $10,000, for a roof repair or to buy a new car, then we can work with you to find out the best way to pay it down.
Oftentimes people don’t consider a home equity line of credit when thinking about paying off their mortgage. However, it can be a great option. They’re very cheap right now with low interest rates and hardly any carrying costs and or annual fees. It’s also a far quicker and simpler solution compared to something like refinancing.
Should you pay off your mortgage before retirement?
One of the most powerful tools you can have in your retirement planning arsenal is a written income plan. This gives you a clear picture of your finances in retirement, including the possibilities if you do or don’t choose to pay off your mortgage.
If you’d like to see what your financial future looks like in retirement, we can help. We offer a completely free 15-minute phone call to anyone who has questions about retirement planning. So, if you want to know more about whether you should pay your mortgage off, book your call today.