Should You Pay off Your Mortgage?
Interest rates are near historical lows, so does it make sense to pay off your mortgage? Eliminating debt is satisfying, but should you sell stocks or bonds to make it happen? Let's explore a few options.
Pay off your mortgage
- If your cash balance at your bank is high, it's wise to pay off your mortgage because cash earns nothing. Current mortgage rates are 3.11%, significantly higher than the 0% you're making from your bank.
- Do you plan to retire in the next few years? If so, eliminate your mortgage. Housing is a considerable expense for retirees, even if you're debt-free. Property taxes, upkeep, and maintenance are not cheap, so removing one more payment is prudent.
- Can you commit to investing monthly for twenty or thirty years? If so, pay off your mortgage. The monthly payment for a $500,000 home is approximately $1,700. Investing $1,700 per month for thirty years could grow to more than $3.8 million.
- If it brings you peace and reduces your stress, pay it off regardless of the math.
Do not pay off your mortgage.
- Do not pay off your mortgage If you expect inflation to rise. In fact, I would recommend borrowing more money because rates are low, but they will increase as inflation climbs.
- If your investments earn more than 5% per year, paying off your mortgage does not make sense. Your gross return could drop by 1% to 2% per year, depending on your tax bracket. For example, if you're in the 32% tax bracket and earn 5%, your after-tax return could fall to 3.4%. When calculating your return, include all your taxable assets, including stocks, bonds, and cash. Do not cherry-pick your best investments.
- If you expect to move in the next few years, do not pay off your mortgage. Instead, keep your investments as a safety net or apply them to your new home.
The stock market has soared the past ten years, so letting your investments grow is smart. However, there have been several periods where stocks have not performed well, like 2000 to 2013, where the S&P 500 fell about 3%. We are not promised tomorrow, and returns are fleeting, but expenses are forever.
"Creditors have better memories than debtors." ~ Benjamin Franklin
January 10, 2022
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM's custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren't suitable for every investor.