Mortgage-Free in Retirement?

Most homeowners have utilized a mortgage loan at one point to help purchase a home. The straightforward purpose of using the mortgage to gradually acquire full ownership of your house is sometimes disrupted by refinances and tax incentives. The question I want to address is: Should paying off the mortgage be an objective at all?

Because mortgage interest is generally tax-deductible, some believe that a homeowner should extend a mortgage as long as he can. Trading a dollar for 30 cents, however, is a bad deal, so this alone is not a sufficient reason. Let’s evaluate five factors that play into your decision to either pay off your mortgage or maintain it.

Stability of Income:

To start, I’m generally in favor of homeowners pursuing the goal of paying off their mortgage for the simple reason that it creates an element of financial safety. A home is not to be categorized as just another investment (even though a paid-off home certainly carries financial benefit). Reckless lending and borrowing tactics caused one of the worst economic declines in American history culminating in 2008 with failing banks, high unemployment and tumbling investment values (including stocks and real estate). During this tumultuous time, those who had their house paid off seemed to have a peace that others with a daunting mortgage payment did not. Paying off a mortgage eliminates an expense, but it really represents an element of income stability much like having a monthly pension to supplant a paycheck in retirement years.

Interest Paid vs. Earned:

This factor is simply a matter of opportunity cost: As an example, if I pay 4% interest on this money but earn 6% interest on that money, I’m ahead. For several years now, interest rates have been historically low making borrowing more advantageous, thus tilting the dial toward keeping a mortgage at a low fixed rate and investing at higher rates. While the math can work, it becomes a comparison of risk. In our previous example, the 4% is a guaranteed savings if I eliminate it. To earn a higher rate, what type of risk must you take on and is it worth it?

Taxes:

As mentioned above, home mortgage interest is generally tax-deductible allowing for an added bonus. The significance of that bonus depends on your personal tax situation. Making a decision based on saving taxes when you are already paying very little in taxes, doesn’t make sense. And, if you are in higher tax brackets, you must look at how deductions are limited for you. In either case, seek the counsel of a quality tax professional.

Flexibility:

The elimination of a mortgage payment is a good thing as is having a lump sum of available money which can help create flexibility and security. So, which do you choose? It’s a balance that must be weighed with all the other factors. For instance, it may not be a good idea to sacrifice every last cent of available money to pay off the mortgage. Alternatively, if you can afford to pay off the mortgage and still maintain financial flexibility, the payoff can aid in creating that stability of income.

Unity with Your Spouse:

It’s not uncommon with a decision like this to see it differently than your spouse. Paying off the mortgage can be an emotional decision. I find that woman especially appreciate the added-security of a debt-free home. If you are in control of the finances, be sure to value your spouse’s opinion. Most often agreement comes after working through a series of steps that would include communicating why you each believe a certain course of action makes sense and how strongly you feel about it. Also, commit to prayer and seeking wise counsel. If the objective on both sides is truly to make the best decision for your family, unity is usually reached.

Granted, each situation is unique when it comes to decisions surrounding a mortgage. Don’t let one specific factor drive your decision. Make sure to consider all these factors in the context of your personal situation. And, remember consult a trusted advisor; this can be complicated.

Seek financial independence through wise mortgage planning decisions….

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