4Q2018 | Ages 50 – 65
To Pay Off the Mortgage or Not to Pay Off the Mortgage? That is the Question.
The obvious answer is that all mortgages will be paid off eventually. However, the question that should be asked is not a question of ‘if’, but a question of ‘when’. Is there a benefit to making additional payments to your home mortgage as you get ready to retire?
Unfortunately, there is not a right or wrong answer to this question. Instead, this is a decision that requires weighing the pros and cons to determine if prepaying your mortgage is right for you.
Cash flow – You can enter retirement without a mortgage payment, which can be very beneficial for someone on a fixed income.
Interest Savings – Paying down your principal will reduce the overall amount interest paid on the loan.
Peace of mind – Retirement is one of the biggest decisions we make in our lifetime. The certainty of knowing you will have a roof over your head helps make the decision to retire a little easier.
Increased Equity – By paying down the principal early, you accelerate the equity in your home.
Tax Deduction – The interest paid on your mortgage is tax deductible.
Liquidity – In California, there is a saying that many people are house rich and cash poor. You may have $1 million of equity built up in your home, but until you sell your home, that $1 million is not liquid. If you have an immediate financial need, it may be difficult to quickly sell the house.
Opportunity cost – What is the potential return on every additional dollar used to pay down the principal of your mortgage? Are you maximizing contributions into your retirement plan or taking full advantage of the company match?
Cash flow – You have eliminated the mortgage but still have expenses to pay, such as property taxes, home owners’ insurance, health insurance, and living expenses.
Low Interest Rates – Over the past 10 years, we have seen interest rates at all-time lows, with people locking in fixed rates as low as 2.9%. If you need to pull equity out of your home, the interest rate may be significantly more than what you were originally paying.
As you contemplate paying off your mortgage early, here are three additional questions to consider:
- Do you have enough liquid savings to generate your required monthly retirement income for the rest of your life? If you do have enough saved for retirement, then putting additional money towards paying off your mortgage early may be a good idea.
- Will your investment earn more than your current mortgage interest rate over the next 10 to 15 years? If you are paying 7%-8% interest, then the answer is probably no. But if your interest rate is 3% – 4%, you could potentially earn more by investing than you would save on interest by prepaying.
- Are you taking full advantage of employer matching contributions? At a minimum, make sure you are contributing up to the company match limit before making additional payments to your mortgage. Regardless of the match amount, this is free money.
As everyone’s situation is unique, there is no right or wrong answer to paying off the mortgage early. If you can confidently arrive at an answer for any of these questions, it might be time to think about beginning the prepayment process or increasing your retirement savings to ensure a financially strong path to retirement.
Goeff Mettler, PPC™, AIF®
Managing Director, Northern California
This commentary is for informational purposes only and does not constitute investment advice nor reference the appropriateness of any individual investment alternative.
Advisory services offered through Prime Capital Investment Advisors, LLC. (PCIA) a Registered Investment Advisor. Prime Capital Investment Advisors doing business as Qualified Plan Advisors, “QPA.” 6201 College Blvd., 7th Floor, Overland Park, KS 66211.