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Should You Repay Your Mortgage Early? 8 Points to Consider.

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Paying off a mortgage is one way to cut expenses in retirement.

Tapio Salmela/Dreamstime.com

In an era of record-low mortgage rates, paying off your home loan early might seem pointless. But it can make sense for many people, particularly those in or close to retirement.

Don’t forget: Even though rates have dropped for mortgages, falling to near 3% on a 30-year fixed-rate loan, they also have plunged for safe fixed-rate investments.

If you pay off a mortgage with a 3% rate, it’s like putting your money in a safe investment yielding that rate. Finding a 3% safe investment in today’s low-rate world—the 10-year Treasury note yielded 1.45% Friday afternoon—can be tough.

“Even if you have a mortgage with a 2% or 2.5% rate, and you can’t get that elsewhere, it’s worth thinking about” paying it off early, says Natalie Pine, a financial planner in College Station, Texas. “With mortgage rates as low as they are, it’s an arbitrage.”

One of Pine’s clients, 38-year-old Lacey Baze and her husband, Justin, last year paid off a mortgage with a rate close to 4% on their five-bedroom, 3,600-square-foot house in College Station. “Our motivation was we didn’t want to be paying interest any more,” Baze said. She said the couple was unable to find any guaranteed investment that would match the rate on their mortgage.

Some advisors tell their clients to invest their money in the stock market instead of paying off their mortgage. Over the long run, stocks should outearn what they are paying in mortgage interest, they note. But it’s not for sure, whereas paying off your mortgage is a guaranteed return.

There is no right answer. Paying off your mortgage is a personal decision that depends on your financial situation, risk tolerance, and perhaps most of all your attitude toward debt. Here are eight factors to consider.

Four Reasons to Keep a Mortgage

You have other debt to pay off. If you are going to have debt, mortgage debt is the best type there is. You’re borrowing to own an asset that tends to rise in value over time, rather than depreciate like a car or clothes or household items. Mortgage rates are lower than for most other consumer debt. And if you itemize your taxes, you’ll probably be able to write off part of your mortgage payments, though less so than before the tax law change in 2017.

For these reasons, you should pay off all other debt before you think about paying off or paying down your mortgage.

“There’s good debt and not such good debt,” says 84-year-old financial planner Cicily Maton of Chicago, who just paid off her own mortgage a year ago. “Credit-card debt is not good. If you’re not paying it off every month, you’ve got to figure out a way to do that.”

It will leave you without any cash. It’s important to have liquidity to handle the emergencies that arise in life: a new roof, a health crisis, a child that needs help. If paying off your mortgage quickly will leave you without any cash, you may be better off doing so over a period of years.

“You’re giving yourself more flexibility by staying invested, you can pull from it if you need it,” says James Basset, a New York City financial advisor.

You can get better returns in the market. If you’re willing to take on more risk, you can likely get better long-term returns in the market than by paying off your mortgage.

“On average, you’ll make more with your investments than with your mortgage,” says Bassett. He says an investment portfolio is likely to return 6% or 7% a year over time, far higher than mortgage rates today.

You want to protect yourself against inflation. Owning a house helps insulate you from rising prices. However, owning a house with a mortgage is even better protection, says economist Laurence Kotlikoff of Boston University. In a traditional mortgage, you’re making the same monthly payment over 15 or 30 years. If inflation spirals out of control, “you get to pay back in watered-down dollars,” Kotlikoff says.

The U.S. hasn’t experienced bad inflation in decades. But we’ve had a huge run-up in government debt, particularly during the pandemic. The annual inflation rate this summer hit 5.4%, way above its level in recent years. Many experts think the inflation spike is temporary, and it will ease within a few months. However, if they’re wrong, owning a house with a mortgage on it could look smart.

Four Reasons to Pay Off a Mortgage

You need to cut expenses in retirement. When you’re working, your income tends to keep going up as you climb the career ladder. There are yearly bonuses for many workers. If you switch jobs, you’ll likely get a pay raise.Retirement isn’t like that. Even upper-income people are likely to be living on less money than when they worked.

If you’re being financially squeezed in retirement, it’s frequently easier to cut expenses than it is to raise your income—particularly in a low-rate environment.

Most people’s biggest fixed expense is their monthly mortgage payment. If that goes away, they can live on far less money.

You have a low risk tolerance. Many people, particularly retirees, aren’t willing to live with the ups and downs of owning stocks and other risk assets. Yes, stocks are likely to outperform over the long term. But that is not for sure.

“People think if they have a mortgage rate of 2.5%, they’ll surely get a better return over the next 15 years in the market,” says financial advisor Mark Fonville of Richmond, Va. “But that is not a certainty. It took 14 years for the market to recoup its losses after the 1929 crash. What is a certainty is paying off your mortgage. You know you’re saving yourself 2.5%”

You can sell low-yielding bonds. In today’s low-rate environment, owning bonds is almost painful. But suppose you decide to sell $200,000 of bonds yielding 1% and pay off a $200,000 mortgage with a 3% rate.

If you look just at your investment portfolio, it will have a higher percentage of stocks than before. But if you look at the entire balance sheet of your financial life, you’re not taking on more risk. You sold a $200,000 asset that paid 1%, and you paid off a $200,000 liability that cost you 3%.

You hate having debt. Even in a debt-crazy country like the U.S., there are millions of people who relish the idea of owing nothing. Paying off the mortgage for them is a big deal.

“We’re not just talking about math,” says Brian O’Neill, a Niceville, Fla., financial advisor whose clientele is primarily military families. “We’re talking about how you feel when you have a paid-for house.”

Alicia Sher, an Atlanta-area financial advisor, says she typically tells clients they can get better returns in the market than by paying down their mortgage. But she adds: “The peace-of-mind factor is really important. A lot of people like the idea of not having debt and having a mortgage.”

In the end, peace of mind trumps all other factors when it comes to the decision about paying off your mortgage. Yes, maybe you could end up with more money by playing the market, but you might get deeper psychological satisfaction by going debt-free for the first time in your adult life.

If that is the case, pay off your mortgage. You’re not wasting money because mortgage rates are so low. And you’re almost certainly not going to derail your retirement or financial goals by getting rid of a mortgage.

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