If you are a homeowner, undoubtedly, you’ve seen the value of your home rise substantially in the last few years. Skyrocketing price appreciation, historically low mortgage rates, and competitive buyers have dominated the real estate market for nearly two years. Even new 30-year fixed loans averaged less than 3% in some weeks during 2021!
With a hot market, many investors are selling their homes for top dollar. However, when investors are making close to $500,000 in pure profit, their next thought is to pay cash for their next home and coast into retirement without a mortgage. While we love the idea of retiring with no debt, having a mortgage isn’t a bad position to be in.
Let us present you three arguments for why we encourage investors to carry a mortgage into retirement.
1. No other investment will allow you to put 20% down and give you the full use and appreciation as you make payments. When you have a mortgage, you’re financing a purchase. Now, you could say the same about anything you can put on a credit card or finance through a lender. However, the difference is that a home will generally appreciate, thus increasing your equity in the asset. That also makes the home an asset and not just an object that loses value like a car. Other assets that can increase in value over time—e.g., art, coins, gold, stocks—you need to pay face value for. You can’t put down 20% and pay for your shares of Apple over the next 30 years.
2. If you’re following the Henssler Ten Year Rule, your mortgage payments are more secure in retirement than during your working years. When you’re working, your lifestyle—which includes what you spend on housing—is dependent on your ability to earn an income. Should you lose your job, you likely have an emergency fund of six to 12 months’ worth of expenses that would cover your mortgage payment until you find employment again. When you’re in retirement, you should have 10 years’ worth of spending needs in fixed-income investments that are shielded from the volatility of the stock market. During market highs, replenish your fixed-income buckets, so you always have a rolling 10 years of expenses covered. Ten years generally lets you wait out a downturn in the market before needing to sell investments to cover your expenses.
3. You can generally earn more on your investments than you are paying in interest on your mortgage. For the last 13 years, most mortgages have carried less than a 5% interest rate. In that same 13 years, from 2009 to today, the S&P 500 index has grown around 553%. While we say your home value skyrocketed, it was likely less than 553%. Even the historical dividend yields for the S&P 500 have typically ranged between 3% to 5%, so dividends alone could cover the interest on your mortgage.
Past performance never guarantees future results, so these situations may not always be the case. This recommendation works great given the current interest rate environment, but if we see mortgages with 10% interest rates over the next few years our recommendation will change. However, more often than not, you can do better things with your money than pay cash for your home.
If you have questions on how carrying a mortgage can work in your favor, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the March 26, 2022 “Henssler Money Talks” episode.
This article is for demonstrative and academic purposes and 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.
