From U.S. News and World Report:
Many personal finance experts extol the virtue of being mortgage-free.
I agree that, for many people, paying off the mortgage is a great move.
While it may not always maximize your return on investment, the payoff of having no more mortgage can be substantial. Chief among those benefits is peace of mind. It’s hard to put a price tag on that. And this is why so many of us want to pay off our mortgage as soon as possible.
Having said that, there are three instances where paying off a mortgage is the worst mistake a person could make. Let’s go through these one by one:
1. Significant Life Changes
If you are going through some big personal changes (or are about to), don’t pay off your mortgage. A few years ago Jeanie lost her husband of 30 years. She considered an early mortgage payoff, but it would have been a mistake. Why? Because she didn’t really know what her financial life was going to look like 12 months down the line. She needed to remain flexible.
Of course, her natural inclination to pay off the mortgage was understandable. When life seems to be spinning out of control, we desperately try to regain control over those things that seem controllable.
In this case, the future was so uncertain for Jeanie, she had no business making large financial decisions. If you face a similar situation or are planning other life changes, like looking for a new career, refrain from paying off your mortgage until your situation becomes easier to see clearly.
2. Can’t Afford to Feel Good
Paying off your mortgage is a great feeling, but sometimes that good feeling is just too darn expensive.
Tom called me yesterday and he wants to retire in two years. He has a mortgage of $100,000 and the interest rate is only 3.5 percent (after tax benefits). He asked if it made sense to pay off the mortgage.
He is currently only 63 years old and estimates that over the next 10 years he’ll earn, on average, 6 percent (after tax) on his investments. Tom is using his current investments to create income and relies on that income. If you look at the numbers, you’ll see that he expects to earn 2.5 percent more on the money than the cost of his mortgage. That’s about $2,500 a year, and Tom needs that extra income.
You can see that while it might feel great for Tom to pay off his mortgage, it would take $2,500 out of his pocket, and he simply can’t afford to cut his income by $200 a month.
3. Spending Problem
Often, when people pay off their mortgage, they feel free to spend the money that was going towards the payments. In some cases this is OK, but certainly not in all situations. A house payment can act as a forced savings plan for many of us. If you take away that mechanism, sometimes folks go spending happy and it can lead to a disaster.
Laura’s husband passed away while they were both at the height of their careers. He left her enough life insurance to pay off the house, which was great. But after she paid off the house, she went on a shopping splurge. She didn’t understand that in order for her retirement plan to work, she was supposed to take the extra cash flow and save it.
Besides putting a dent in her long-term retirement plan, she’s developing bad spending habits that can reduce her future plans to rubble.
Paying off your mortgage is great. If you can do it and it makes sense, I suggest you go for it. Just make sure you create a plan that makes sense, so you make good decisions with the added cash flow after you do so.
Neal Frankle is a Certified Financial Planner in Los Angeles and authority blogger at www.WealthPilgrim.com. One of his most current posts was his Perskstreet Review.
Surprisingly, the three exceptions encompass everyone, written by a massively conflicted author. Brilliant, really.
“there are three instances where paying off a mortgage is the worst mistake a person could make.” Really? Worse then drug addiction? Felonious behaviours? Suicide?
The S&P has returned zero in 13 years while paying off the note has been truly the only “risk free return” available to us sled dogs.
Just like you would with medical advice, you should get more than one opinion when it comes to financial advice.
#1 and #3 did not answer the question “Should you pay off your mortgage?”.
#2 makes my head explode trying to account for all the variables. I hope Tom lives in Ca because a 100k mortgage at age 63 sounds very stressful.
Here’s some free advice…if you want to pay off your mortgage then make extra payments to the principal!! If you can’t afford to do that in any given month then pull back and pay the original amount. See? Was that so hard?
Garbage written by people that love to be in debt.
Other than having the liquiduty of cash over the hard asset of a house. How is paying off your mortgage a bad thing? Maybe you can argue that getting a return on investments is better than paying off the back end of a mortgage when you’re no longer getting the interst deduction on taxes.
And the example of a 6% return on investments is a little wonky. Other than REITS what mutual funds or CD’s are offering a 6% return?
@shadash
“How is paying off your mortgage a bad thing?”
I couldn’t agree more. I feel confident I chose the right financial planner/advisor for me because he told me paying off your debt as soon as possible is never a bad idea.
I bought a fixer foreclosure about 1.5 years ago and have been living mortgage free ever since. It’s been amazing.
Work is now for the most part optional when I am working the I end up saving arout 70% of my take home each month. This is after satisfying my chronic spending binges.
changes the way I look at everything.
Remember if your mortgage is at 2.5% paying extra money into it against principal is like earning 2.5% interest on an investment ABSOLUTELY TAX FREE as it is not income and the return isgauranteed.
Hmm.. that doesn’t seem right. If you’re mortgage rate is 2.5%, but the interest is tax deductible, the rate is actually lower. A 2.5% investment that’s tax free actually pays you 2.5%, so the tax free investment wins.
I’m betting, because my interest rate is so low, and it’s deductible, that I’m better off investing my money elsewhere long term.
“I’m betting, because my interest rate is so low, and it’s deductible, that I’m better off investing my money elsewhere long term.”
We’ve always been encouraged by the financial industry to make this bet and most people do make this bet. Some win the bet but many end up losing this bet. Bankers may be criminals but they aren’t dumb. If there was a low risk investment that earned 6% they wouldn’t loan you money at 3.5%.
There’s probably tons of people that would have been far better off paying off their mortgage in 2000 rather than leaving it invested in the stock market.
Every bubble that has ever happened was driven by perceived low cost borrowing to speculate in rising asset prices. Borrow at 7% to buy a house that goes up 15% per year. Borrow on margin at 15% to invest in stocks going up 50% per year. Some got rich, but most went broke.
You’ve got to have some risk tolerance to make money on your investments. And I’m not speculating on real estate; I’m speculating on stocks and inflation. The value of my house isn’t so important, because I’m not planning on selling it for a long time.
Nothing wrong with equities speculation, all part of a balanced portfolio. Likewise paying down the mortgage is risk free return, another element of a balanced book.
If you are planning on having a debilitating stroke or other major health problem and want MediCal to cover your medical costs, it is better to have a paid-off house and no dough.
They will take over payments once you run out of money, and house equity is exempt.
Jim,
PLAN on having a debilitating stroke? You may want to throw salt over your shoulder.
I haven’t met someone planning major health problem, but I’ll be sure to give them that great advice when I do.
Trying to emphasize my point that medical costs sneak up on you. My parents drained their accounts on stuff not covered by insurance, and as soon as my Dad qualified for MediCal, he died.
We thought it was smart to have a mortgage of a couple of hundred thousand to keep more cash available, but in hindsight, probably not – at least not solely for medical costs.
(AP) — A California man has pleaded guilty to federal charges that he defrauded investors out of $16 million in a Fresno golf course and housing project.
Thomas O’Meara entered the plea on Wednesday to wire fraud and money laundering.
Prosecutors say the former Carmel real estate developer recruited more than 50 people to invest in the 18-hole golf course and gated housing development.
The Running Horse course was designed by golfer Jack Nicklaus’ firm and was supposed to host a PGA event.
According to the indictment, O’Meara lied about Nicklaus’ firm and the PGA Tour’s confidence in the development and its financial condition. The project eventually failed.
Prosecutors said the 65-year-old O’Meara has agreed to pay at least $7 million in restitution to the victims.
“They will take over payments once you run out of money, and house equity is exempt.”
What if you own more than one property? Are you required to liquidate all but the primary residence?
I thought you could just wait to pay your mortgage off until you need the MediCal benefits.
I don’t know about the rental proprties, there weren’t a lot of easy answers available. But I would guess that they would exempt primary only?
But I haven’t seen anyone having to sell rentals to pay medical expenses.
Interest rates are the lowest in history. It does not make any sense to pay of your mortgage. Let that debt ride as long as possible.