Should I Pay Off My Mortgage?
Written by Josiah Larson, Associate Wealth Management Advisor
If you have read or listened to any financial news in the recent past, you have likely heard that “mortgage rates are at historic lows” and that “the cost of borrowing has never been cheaper.” Similarly, it seems that just as often we hear that the leading market indices continue to hit record highs. With 30-year mortgage rates hovering in the 3% range and the S&P 500 Index up over 15% year-to-date (through July 15, 2021), many who have large sums of cash on hand are asking: Should I pay off my mortgage, or invest in the markets? If you find yourself asking that question, here are some things to consider:
1. Consider your return on investment (ROI)
Generally, more aggressive investors place a higher value on potential To them, the opportunity to potentially earn a higher rate of return on an investment relative to the interest rate they are paying on their mortgage outweighs the risk (the possibility of investment losses), so they may choose to invest rather than pay off their mortgage. Conversely, more conservative investors tend to place a higher value on certainty, and they see the opportunity to pay off a mortgage as a form of “guaranteed” ROI (i.e., reducing their cost of the mortgage interest rate) and the risk is giving up the potential to make more money in the financial markets. Where do you fall on this spectrum?
2. Consider the tax write off
Many investors avoid paying off their mortgage because they want to retain the ability to write off mortgage interest as an itemized deduction on their taxes. In 2018, however, the Tax Cuts and Jobs Act (TCJA) legislation was passed, which drove far fewer Americans to itemize deductions on their taxes, thus making mortgage interest write offs irrelevant to their tax strategy. For those that still find this tax strategy relevant to their situation, consider that while you may be getting a deduction on your taxes, you are still paying cash out of pocket to cover the interest on the loan. In the end, before making your decision, consult with your personal tax advisor to determine the tax impact of a mortgage payoff decision.
3. Consider the psychological impact of debt reduction or elimination
Finances impact more than just your wallet. Beyond the numbers, there is a psychological factor to be considered in a conversation about debt, and especially major debt like a mortgage. While we recognize that each client is unique in how they view and utilize debt, as an organization, we encourage prudence in the levels and use of debt and place a high value on the freedom that debt elimination can bring. If you and/or your spouse will sleep better at night with your home paid off, we highly recommend taking this into consideration as you make your decision.
4. Consider a both/and solution
Rather than fully paying off a mortgage in one fell swoop, many of our clients opt to take a both/and approach by setting a goal date in the future to have their mortgage paid off. With our sophisticated financial planning software, we help them get a plan in place and determine how to use a portion of their money to jump start that early payoff goal, while simultaneously advising on how to appropriately invest the other portion of the money into the financial markets. Do you have a plan in place?
In the end, when deciding whether to pay off your mortgage or invest in the market, QA Wealth Management firmly believes that no two clients are alike and that a thoughtful conversation with an experienced advisor is crucial as you weigh your options. If you would like to have this conversation with us, please let us know.