Written by Kelly S. Olson Pedersen, CFP®, CDFA
Consider the Pros and Cons
From the standpoint of black and white math, you invest your money where it will earn the most. If the market is generating more return than you’re paying in interest, then the math says to keep your mortgage as your investments will earn more than enough to pay for that interest! On the flip side of this, we tell all our clients that paying off a little extra of their mortgage every year is like earning a guaranteed rate of return equal to your interest rate. The investment market on the other hand, is not guaranteed.
People who take itemized deductions on their tax return get a valuable benefit from having paid mortgage interest. For example, if you paid $10,000 in interest and your average federal tax rate is 30% you will save almost $3000 in taxes – that is real money in your back pocket. You can almost say that your mortgage costs weren’t $10,000…. They were $7,000 for the year!!!
If cash flow is tight, but you have plenty of assets saved for retirement (say in an IRA) you may want to think about paying off the mortgage to free up that monthly payment.
We like to remind people that paying off the mortgage is practically final… you can’t go back and change your mind without going through underwriting again and getting a new (probably higher) interest rate. On the flip side, you can pay it off anytime. So if you’re indecisive about this, the best decision is to stay the course on the mortgage until you are definite that you want to pay it off.
If you use your investment assets to pay down the mortgage, you cannot reverse this decision. Your financial plan will need to be able to withstand the lack of growth on those investments!
All the math in the world can point toward keeping the mortgage, but if you don’t feel good about that and it keeps you up at night with worry it’s simply not worth it. There is a happy medium to be had. There is a return on your happiness… it’s just harder to measure!
At Caissa, we run stress tests on the different variables and how they will impact the financial plan. This allows our clients to feel confident in the decision they make as they know what happens either way.