Should I Payoff My Mortgage?

In addition to holding a Florida real estate license, I am also a Florida registered investment advisor. In my financial planning practice I am often asked, "Should I pay off my mortgage"? The simple answer is yes, but it depends on your personal financial circumstances. Most advisors will not "promote" paying off a mortgage as they have no way of generating revenue from the equity invested in your home. It also depends on how much "liquidity" you have with other investments. For the past two decades, I have dealt mostly with retirees and planning their income and managing their investments. When one is living on a "fixed" income, it is important to have as little debt as possible. Some may argue with the fact that you might be better off having a mortgage for tax benefits, and with this low interest rate environment investing the difference. Here are two scenarios with and without a mortgage:

Under Scenario No. 1, you have a $400,000 mortgage at a 4% interest rate. You pay $16,000 annually in interest and may get a $4,800 tax deduction at the 30% marginal tax rate. Your net cost: $11,200. Meanwhile, you invest $400,000 in a conservative investment-grade bond fund paying 2.5%. You earn $7,000 after a $3,000 tax bill.

Under Scenario No. 2, you pay off the mortgage and lose the $7,000 in after-tax bond interest. But, you save $11,200 in after-tax interest payments. You come out on with $4,200. Yes, most will likely pay more in taxes, but it is more important to earn more money after taxes! Furthermore, taxpayers may not necessarily take full advantage of the mortgage interest deduction. For those with relatively modest incomes, some of the interest deduction may not help as it only gets them to the standard deduction.

I recently had one of my financial clients tell me that advising them to pay off their mortgage, was one of the best advice they had received over the past 5 years. They followed up with, " We now have more discretionary income on a monthly basis to travel and do more things for our children and grandchildren."


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