The problem with “Conventional Wisdom” is that it is an easy way to make a decision — it’s what everyone generally does, according to the Oxford dictionary. But you’re not everyone are you? Consider this — conventional wisdom says homeowners should pay off their home loans before retirement. But does this really make sense for you?
For some affluent seniors, a mortgage may be a better financial decision. Could it be that it’s better for you to consider refinancing a jumbo loan to get the lowest possible rate (today at 3.125% for a 30 year/2.875% for a 15 year mortgage) and keep your savings in investments, where your money could easily earn more during those 15 or 30 years?
But, you say, the money in my savings account that could be used to pay off a mortgage is only earning 0.2% now, why not take that to pay off my 3.5% mortgage loan and stop having to pay mortgage payments? That’s a very good question and the answer is multi-faceted and not so simple. Here are some things to consider:
- Monthly payments and sudden cash needs. Borrowers need to consider whether they have the cash flow not only to make mortgage payments, but also to cover unexpected events, such as a health emergency, home renovations or repairs, car purchases for example. Often, we see parents needing to lend money to their children to help them with their own emergency cash needs. If you use your savings to pay off your mortgage, you may not have enough ready cash for these situations. Even though you may have built up a nice retirement account nest egg, that is normally the last place you want to go to raise cash since every dollar you take out of a Retirement Account is 100% taxed. Also, though you may not be making a mortgage payment, your home will still cost you in property taxes and possibly homeowners-association fees.
- Consider your retirement goals. Seniors should also calculate the cash they expect to need for retirement lifestyle choices, such as travel or college tuition for lifelong learning. You may want to have cash to make gifts to family members, such as funding 529 Savings Plans to help your grandchildren’s college costs.
- Short term returns vs. long term costs. Do you think you could earn more than 3.25% on your investments over the next 15 years? If so, then using that money to pay down a debt of 3.25% doesn’t make much financial sense. When interest rates on your savings increase to 5% or more, which they easily could in the near future, will you be happy that you took those savings to pay off your mortgage? Does it make sense for you to take funds that could be earning you income in the future to pay off an asset that only costs you money like your house does? Have you really saved enough to be able to afford increasing lifestyle costs, when inflation comes back? If you’ve put most of your after-tax savings towards paying off a fixed rate mortgage, will you have enough to fund your lifestyle expenses?
- Tenure of current mortgage and the mortgage interest deduction. If you have had your current mortgage loan for more than 17 years, the amount of interest you are actually paying could easily be an insignificant part of your monthly mortgage payment. Your monthly payment at that point in the life of your loan is going primarily to pay off the principal so you are not getting much of a taxable mortgage deduction like you were in earlier years.
- Trust your gut. Knowing that the mortgage is paid off could be a lifetime goal of yours (maybe you remember the day your parents ‘burned their mortgage’ when the last payment had been made) and you want to do the same. It could give you peace of mind. Don’t underestimate the value of a good night’s sleep in making a financial decision.
For many retirees, they have accumulated other assets by retirement, and being debt free is more a matter of choice. Can we help you assess whether paying off your mortgage makes sense for you?