Money Pilot Financial Advisor Podcast
Money Pilot Financial Advisor Podcast
Episode 79 Mortgage Payoff
I’ve had clients close to retirement to asking, “Should I pay off my mortgage before I retire?” The bottom line up front is that in the long run, dollar for dollar its very likely you would much better keeping a low interest mortgage and investing that cash in a moderate risk portfolio. But YOUR decision to keep or pay off your mortgage depends on a lot more than just a spreadsheet.
First do you have the cash available to pay off your mortgage or some extra income now that you can use to make extra payments and pay it off sooner? Why are you considering paying it off early? Will it help you sleep at night? Honestly, if having a mortgage payment in retirement will have you living in fear of losing your home, it doesn’t really matter what the numbers say or what opportunities you leave on the table.
Other benefits of paying it off are you won’t have to pay interest on a loan you don’t have. No mortgage can improve your cash flow with lower fixed costs each month. This can be a big help if your circumstances change.
And keeping your mortgage? First, you’ll need to have income coming in to make a mortgage payment along with your other expenses. If you can, you may end up much better off if you don’t pay that mortgage off now. And instead invest that money, and enjoy years of compounding growth. Especially if you financed or can refinance at these historically low home mortgage interest rates.
Let's say you have a mortgage with a 3% interest rate, balance right now of $200,000, and 15 years of payments left. Or refinance to a 15 year mortgage at 3%. Over 15 years, you would pay just over $48,000 in interest. Pay off now and you save $48,000.
Now instead of pay off the mortgage, you invest that $200,000 in a fairly conservative, diversified investment portfolio of half stocks and half bonds. Historically, this will earn you a return of at least 6%. That $200,000 invested for 15 years with a 6% annual return will grow to just over $490,000. That’s a profit of $290,000. Now you still had to pay $48,000 of mortgage interest. Which still leaves you more than $250,000 better off by keeping your mortgage and investing!
I mentioned your decision is about more than just a spreadsheet. Paying off your mortgage is a sure thing. That $200,00 disappears form you bank account and you own your home free and clear, period. If you keep your mortgage, with a fixed interest rate that interest cost is a sure thing. BUT, that investment return is not guaranteed.
For keeping your mortgage to be a better option for you, your overall return on your investments needs to be higher than your mortgage interest rate over the life of your loan. Even with conservative investment portfolio there is a very good chance that keeping your mortgage with a low interest rate is better choice, but there is no guarantee. Again, this is where having a reliable cash flow in retirement and emergency fund are key.
In the end it comes down to what options are available to you and how you tolerate uncertainty. Let’s do a quick review. If you are comfortable with some uncertainty, you will have reliable income to pay your expenses in retirement, including a mortgage payment, and you can lock in a mortgage interest rate that is lower than the profit you can expect from investing, keeping that mortgage could be a very good choice for you and leave you with a higher net worth.
If you don’t think you’ll have the income to cover all your retirement expenses and a mortgage, or you won’t sleep at night with a mortgage payment having over you head, no matter what the numbers say, your best choice will probably be to go with the sure thing and pay it off.
And if you still have a mortgage over 3% your window for getting a lower rate is is probably closing. For more info on the refinance decision go back to Episode 18.
Welcome to the Money Pilot Financial Advisor podcast, where you team up with Money Pilot founder, former Army helicopter pilot and your host Katie Cannon to put your money where your heart is. Together, we'll tackle issues big and small so you can take charge and lead your financial life Hello, and welcome back to the podcast. In Episode 18 Refinance Decision, we talked about how to decide if it makes sense to refinance your mortgage. And if you're still on the fence about refinancing, definitely go back and listen to Episode 18. The Fed has announced its intent to increase interest rates. So this run of really low mortgage rates is probably coming to an end. In the last few years, many of my clients have found refinancing was a great choice for them. And I've been locking in rates under 3%. With all these mortgage discussions, I've also had clients who are closer to retirement asking, should I pay off my mortgage before I retire? Many listeners out there have a goal of retiring debt free, and this often means paying off a mortgage by retirement. But if you've been wondering if this is the best option for you, then you definitely want to listen in on today's episode. Let's start off with the bottom line up front. In the long run dollar for dollar, it's very likely you would be much better keeping a low interest rate and investing the cash in a moderate risk portfolio. But your decision to keep or pay off a mortgage depends on a lot more than just a spreadsheet. First, ask yourself is paying off my mortgage an option for me? Do you have the cash available? Or have some extra cash income now that you could use to make extra payments and pay it off sooner? Then why are you considering paying it off early? Will it help you sleep at night? Honestly, if having a mortgage payment and retirement will leave you living in fear of losing your home? It doesn't really matter what the numbers say, or what the opportunities you leave on the table. What are some of the other benefits of paying your mortgage off? Well, you won't have to pay interest on a loan you don't have. And that can be a substantial savings. Not having a mortgage can improve your cash flow and be easier on the budget. And no mortgage means lower fixed costs that you have to cover each month. This can be a big help if your circumstances change. And money ends up being tighter than you thought. Or if there are unexpected bills from say, a house repair or a big medical expense. So what about keeping your mortgage in retirement? First, you'll need to have income coming in to make a mortgage payment along with your other expenses in retirement. Can your pension and other income like maybe from a part time job you enjoy easily cover your mortgage and other living expenses. If you can, you may end up much better off if you don't pay that mortgage off now and instead invest the money and enjoy years of compounding growth, especially if you financed or can refinance at these historically low home mortgage interest rates. So let's take a look at some numbers. Let's say you have a mortgage with a 3% interest rate. Your balance right now is$200,000. And you have 15 years of payments left. These numbers will also be the same if you refinance to a 15 year mortgage at 3%. So over those 15 years, you would pay a total of just over $48,000 in interest. Pay off with cash now and you save$48,000 That's mortgage interest. You never have to pay. That sounds pretty awesome. Now let's say instead of using that $200,000 to pay off the mortgage, you invest it in a fairly conservative diversified investment portfolio of half stocks and half bonds. And this can be done pretty simply with a few mutual funds, for example. Historically, this portfolio will earn your return of at least 6%. $200,000 invested for 15 years with a 6% annual return will grow to a little over$490,000. That's a profit of$290,000. Now, because you didn't pay off your mortgage, you'd still have to pay that$48,000 of mortgage interest, which still leaves you more than$250,000 better off by keeping your mortgage and investing. That's some serious cash. Now, I mentioned earlier, that your decision is about more than just a spreadsheet. Paying your mortgage off is a sure thing. That $200,000 disappears from your bank account, and you own your home free and clear period. If you keep your mortgage with a fixed interest rate, that total cost of interest you have to pay is also a sure thing. But that investment return is not guaranteed, your profit will almost certainly be more or less. For keeping your mortgage to be a better option for you. Your overall return on your investment needs to be higher than your mortgage interest rate over the life of your loan. And even with a conservative investment portfolio, there's a very good chance that keeping your mortgage with a low interest rate is a better choice. But there's no guarantee. And again, this is where having a reliable cash flow and retirement and emergency fund are key. If the markets were to take a hard turn, and you end up tapping out those investments, it cuts your profit, but you'll still have to pay that mortgage interest. In the end, it comes down to what options are available to you and how you tolerate uncertainty. Let's do a quick review. If you're comfortable with some uncertainty, you will have a reliable income to pay your expenses in retirement including a mortgage payment. And you can lock in a mortgage interest rate that is lower than the profit you expect from investing, then keeping that mortgage could be a very good choice for you and leave you with a higher net worth in the end. If you have the cash available to pay off your mortgage, but don't think you have the income to cover all your retirement expenses and a mortgage or you won't sleep at night with a mortgage payment hanging over your head. No matter what the numbers say your best choice will probably be to go with the sure thing and pay it off. I hope today's discussion about paying off your mortgage before retirement has been interesting. And if you still have a mortgage over 3% your window for getting a lower rate is probably closing. If you want more info on the refinance decision, go back to Episode 18. And if you decide you want to refinance get on it quickly, and I'll talk with you again next week.
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