Should I Pay Off My Mortgage?

[Pages:1]Should I Pay Off My Mortgage?

A frequent question from clients and friends is whether it makes sense to pay off their mortgage early, especially prior to their retirement. After all wouldn't it be nice to reduce your expenses during your golden years? As desirable as this sounds, it is worth considering carefully. An obvious benefit of paying it off is to reduce the monthly outflow that could otherwise be used for living expenses or leisure & recreational activities, as well as removing the psychological benefit of reducing or eliminating debt. Simply put, debt reduction bolsters financial security and peace of mind. On the other hand, some avoid paying off their mortgage so they can take advantage of a low interest rate loan, as well as benefit from the mortgage interest deductions. Evaluating the financial impact of this decision, you would most always do better investing your money, as opposed to paying off your loan. For example, consider if you have a 3% interest rate on your mortgage, and able to deduct ? your net after-tax "cost" of that borrowed money is only 1.95% (for someone in the 35% marginal bracket). Historically, this has been a very easy "return" to beat with a simple balanced investment approach. Surely, most investors would agree that they've experienced better results over the long term. However, times have changed and the tax changes of 2017 have altered this math, as the benefits of itemizing vs. taking standard deductions have changed. For many now, taking standard deductions is not only simpler, but also more beneficial. But, with the standard deduction, comes the elimination of the tax advantage of holding a mortgage. And so other factors must now be considered in making this decision. Consider that once you decide to pay off your loan, thus "shifting" liquid assets into your home, the action is generally irreversible and your liquidity is reduced ? so proceed with caution. While shifting money from your bank account to pay off your mortgage won't necessarily impact your net worth, it will shift your wealth to that of a less liquid nature. Being "house rich and cash poor" can be problematic, especially if your income needs change or tough times appear. Furthermore, retirees often do not have the ability to easily generate additional income, from sources outside of their portfolio, unless they decide to "unretire". So, unless you have ample, liquid, financial assets along with a nice emergency cash reserve, proceed with caution. Of course, everyone's situation is different, so it is important to consider all factors before making a big shift in your net worth statement, including your: goals, time horizon, liquid assets & liquidity needs, retirement assets, withdrawals needed from your investments, other sources of income, etc.... If you are curious if this is the right move for you and your family, I can help you to sort through the details and come up with a plan.

~Ken

Kenneth Dow, CFP?, CIMA? The Dow Group of Raymond James One Parkview Plaza, Suite 250, Oakbrook Terrace, IL 60181 630.203.1180 // kenneth.dow@

thedowgroup

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