As a Financial Advisor, I talk to clients about all aspects of their finances, including their mortgage.
The question I am often asked is, “Should I pay off my mortgage before I retire?”
My answer used to be: “No.”
At the time, interest rates were low and returns on portfolios were high. The logic was to keep the low-interest mortgage in place so that you could put more money into investments that would yield a higher return.
After two stock market crashes, the bursting of the tech stock bubble in 2000, and the Great Recession of 2008-2009, I have changed my answer. As I assessed clients during these two market downturns, I found that those without a mortgage managed these crises better than those who still had a mortgage payment.
Let me explain why. Let’s say you have a $200,000 mortgage. Assuming an interest rate of 4.25% on a 30-year mortgage, your payments would be $984 per month. Over the next 30 years, you would make 360 payments. The total of those payments would be $354,240. On your $200,000 mortgage, you would pay $154,240 in interest payment to the bank. Ouch!
Now let's consider the same $200,000 mortgage with the same interest rate of 4.25%, but instead, you have a 20-year mortgage. Your payments would go up to $1,238 a month. It is a higher monthly payment but your total payments are only $297,120. On the same $200,000 mortgage, you had $97,120 in interest payments or a savings of $57,120. Obviously, cash flow will dictate if you could afford to make a little larger payment. But if you could, my question to you is, what would you do with an extra $57,000?
One of my favorite questions to ask people is “What would life look like without a mortgage?” Quite frankly, life gets very simple. That is why I urge you to consider paying off your mortgage by the time you retire.
What would your life look like without a mortgage? What would you do with that extra money? How would it make your life easier?
If you would like to discuss options for paying off your mortgage and creating a Wealth Plan that will help you to prepare for market fluctuations, call our office and we would be happy to discuss your options.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss.
photo credit: free pictures of money <a href="http://www.flickr.com/photos/126278138@N03/17116028249">Housing Market</a> via <a href="http://photopin.com">photopin</a> <a href="https://creativecommons.org/licenses/by/2.0/">(license)</a>