Should you be trying to pay off your mortgage?
June 13, 2011
Anyone contemplating retirement at some point has to wonder if they should be trying to pay off their mortgage. Wouldn't retirement be so much easier if you didn't have a house payment?
Many financial experts hesitate to make a blanket recommendation about paying off the house, however. That's because you have to look at where the payoff money is coming from, and that varies. Not everyone has the equivalent of their mortgage balance sitting in their checking account.
When paying off your house is a mistake…
For instance, if you're pulling money from investments that are earning 8 to 9 percent a year and your mortgage is only 5 percent or as low as current mortgage rates, it doesn't make a lot of sense.
Another big mistake would be redirecting money from, say, tax-deferred savings accounts where you're contributions are being matched by your employer. Diverting money from the best savings accounts that are tax deferred could cost you the 50 percent or so match being made by your boss.
A 2006 report from the Federal Reserve Bank of Chicago found that nearly 40 percent of U.S. households are increasing their mortgage payments instead of going into a tax-deferred savings account. The bank said that was a bad idea. Pushing money into tax-deferred savings accounts and reducing their mortgage payments could pay them 11 to 17 cents on the dollar, the bank report said. That amounts to about $1.5 billion a year.
... And when it isn't
On the other hand, if your payoff stash is tucked away in a money market account, certificate of deposit or other savings accounts that are currently paying very low interest rates, it might make more sense to pay off the house. Even the best CD rates are relatively low right now.
Why age matters
Another factor, according to SmartMoney.com, is your age. If you're in your `70s and you still have a lot of money in a volatile stock market, you're probably better off liquidating and paying off your mortgage. It also makes sense if you're planning to take out a reverse mortgage because your possible monthly return will be higher if you have more equity in the home.
A game-changer on the pay-off-or-not debate is what President Obama and Congress decide to do about the mortgage interest rate tax deduction. Although a Gallup/USA Today poll found that more than 60 percent of Americans oppose eliminating this beloved write-off, many experts say broadening the tax base in order to pay off the deficit will almost certainly require this.
