One of the most common questions I get from clients when they sell a business, inherit money or retire is “should I pay off my mortgage?” While the answer depends on several factors, I am extremely reluctant to pay off a mortgage in today’s interest rate environment. Rates on mortgages are currently the lowest we have ever seen. If I have money that is or can be invested for a longer time period I have a hard time justifying why I would want to get rid of a very low rate mortgage and give up a potentially higher rate of return to do it. For example, if my investments were earning 8% and my mortgage is 3% (even lower after possible tax deductions), why would I ever want to give up the 5%-plus difference between those two numbers? Always earn interest at the highest rate and pay it at the lowest rate. Now if the example was a credit card with a 29% interest rate, then yes, get rid of it as fast as possible. But in the case of a mortgage, I would much rather leave the money invested and even take monthly distributions out of the investments account if I needed help making the payments.
Now is the time to look at refinancing if you haven’t already. Rates are so much lower than they were even a few years ago, you have to run the numbers and see if you can either save money, or reduce your mortgage from a 30 year to a 15 year and pay the same or a little more.
For many people there is a psychological comfort in not having a mortgage. We have been trained to want to be debt free, and generally speaking, I absolutely agree with the idea, with the exception of having a low interest rate mortgage vs. having a larger investment account. Remember, you can always use the investment account to pay off the mortgage, but you can’t always go back and get a mortgage after it’s paid off. If I was younger and working in a stable job and had no mortgage, I could even argue that I’d want to take one and use the money for a long-term investment. It would give me a clear advantage over a long time period of what that money could grow to in say an Index 500 fund vs. the total interest paid over the life of the mortgage.
For example, if I took a $100,000 30-year mortgage at 2.9% interest, I would pay about $50,000 in interest. If I invested the same $100,000 in an S&P Index fund over the same 30 years I would have earned $900,000 in interest assuming an 8% annual return. If you hand me $50,000 and I hand you back $900,000, when would you stop doing that? I hope the answer would be never.
While the desire to not have a mortgage can be strong, I would encourage you to look at the numbers and decide if it really makes sense to pay off your mortgage. I would argue in most cases for those with a low rate, it might not make the most sense.
T. Eric Reich, CIMA, CFP, CLU, ChFC is president and founder of Reich Asset Management and can be reached at 609-486-5073 or firstname.lastname@example.org.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. Neither Kestra IS nor Kestra AS provides legal or tax advice. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC.