We often discuss whether or not you should have a mortgage in retirement, but what if you’re younger? Does it make sense to pay down your mortgage as soon as possible so that you can live a debt-free life? At Henssler Financial, we consider homeownership a lifestyle choice rather than an investment.
Many consumer finance gurus will say yes, based on the interest rate calculation. The math doesn’t lie: If you pay a mortgage off early, you will pay considerably less in interest over the life of the loan. Let’s say you have a $200,000 loan at 3.75% for 30 years. Over the life of that loan, you’d pay $133,433 in interest. If you doubled your monthly payment, you’d save about $89,083 in interest.
What they don’t do is look at other calculations. If you were to take the extra payment and invest it elsewhere, would you be better off? The market’s long-term average is 10.5%. If you invested your extra mortgage payment of $926.23 for 30 years and were able to earn a long-term average of 10.5%, you would have a nest egg of $2,330,766.
However, life never works this way. The markets fluctuate; your family situation may change, and you will not likely remain in your home for the next 30 years. The reason consumer finance specialists believe it is better to pay off the mortgage as soon as possible is that in addition to life variables, they believe people are not disciplined enough to invest the difference regularly over the long term. However, if you are working with a trusted financial adviser, you can work together to make your savings automatic, either by increasing your 401(k) contributions or directing part of your paycheck to an IRA. Even if your plans or goals change, your adviser can help adapt your savings to your new circumstances.
There are also tax benefits to carrying a mortgage as you can generally deduct the interest you pay on a loan to buy, build or improve your home when you itemize your deductions. We are in a historically low mortgage rate environment. For the past two years, the average 30-year fixed mortgage carried an interest rate between 3.32% and 4.27%. But that is not the true cost of borrowing money. Let’s say you have a $200,000 loan at 3.75% and you are in the 25% tax bracket and a 6% Georgia tax rate. With the mortgage interest tax deduction, your after-tax rate borrowing cost is 2.64%.
If you were acting as a CFO, and your home was your company, what would be the more prudent decision—putting your money into your company or keeping your money liquid and taking advantage of opportunities to make more money elsewhere while having the additional flexibility that the liquidity provides? Could you find an investment that beats 2.64% over the long term? Additionally, once your money is invested in the house you have to obtain a loan to convert it to cash should you need it.
Even if you were able to take $200,000 and pay off the mortgage on your home, you first should consider where you may be in five or 10 years. Let’s say in five years, you want to buy a new, bigger home to accommodate your growing family. If all of your cash is tied up in your current home, you would first need to sell your home before being able to put money down on a new home.
Overall, you should come out ahead by continuing to pay the mortgage on your largest asset while investing your extra money for retirement. If you have questions regarding how your mortgage fits in your overall financial plan, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
