CLEVELAND, Ohio – Back when I took out my first mortgage with an interest rate of 10.25%, nothing sounded better than one day being able to pay off that 30-year loan ahead of time.
Even after borrowing more for an addition, it still sounded good. But a few years ago with a refinanced rate of 3.85% and the savings from a tax deduction for interest payments dwindling before going totally away in my case, I determined, “What’s the rush?”
That approach triggers a lot of surprised looks from friends when the topic of being clear and free of a mortgage comes up in conversation.
My theory was that that my mortgage with a monthly payment well below $1,000 still will be eliminated before retirement. So I’d rather put extra money in my 401K, where the returns historically have been better than that 3.85% interest charge, and toward saving more for the next car purchase.
But what are the pros and cons to this line of thinking?
For that, I recently went to four financial planning pros for their takes. All agreed that making a call on this question is tied both to your individual circumstances and what’s important to your comfort in making financial decisions.
Here’s what they had to say.
Scott Snow
Scott Snow financial advisors, Westlake
“This question comes up quite frequently,” said Scott Snow, a certified financial planner and managing director of Scott Snow financial advisors in Westlake. “It really comes down to a clients’ risk tolerance. For the more conservative clients, especially if they have cash in the bank, take that cash and wipe out that mortgage or pay it down.”
Snow points out that someone placing their money in bonds returning less than 1% is losing out if they’re paying a mortgage at close to 3.5%.
People with less than 70% of their money in stocks could benefit by paying down their mortgage, Snow said: “It gives them piece of mind.”
But for people with a higher risk tolerance – with more than 70% in stocks - Snow said it can make sense to hold a mortgage.
Over the last 90 years, large company stocks have gained about 10% a year, with small company stocks closer to 12%, he said, though that of course is no guarantee for the years ahead.
One strategy Snow offered is to cash out gains when the market appears to be peaking, such as when the Dow Industrial Average reached 29,500 earlier this year, and using that money to pay down a mortgage.
Snow said he had two clients do just that.
Britta Koepf
Practical Financial Planning, Rocky River
“We are big fans of mortgages,” said Britta Koepf, a certified financial planner at Practical Financial Planning in Rocky River. “We love those 30-year fixed-rate mortgages. If you have a mortgage ... (that leaves) more money available to invest. Instead of paying an extra $1,000 a month, you can put that in a 401K, or an IRA. Or you can put it in a plain old investment account.”
Koepf said a client of hers, age 72, recently refinanced his mortgage for another 30 years. He has a steady stream of pension income plus some investments. The choice was to keep more money in the investment accounts.
“Chances are there will still be a mortgage when he dies. But there will still be a house when he dies,” Koepf said.
Koepf said she understands that “not all financial advisers agree with me,” but adds “a lot do.”
Koepf does point out that maintaining a mortgage isn’t for everyone - people for whom “having a mortgage over them makes them nervous.” But even for that person, she offered this advice: first pay other bills with higher interest rates before paying extra on a mortgage.
“People have come to me and said they were paying extra on their mortgage, but they have credit card balances,” Koepf said. “The first time I saw it I was taken back. One is charging 20%. One is charging 4% (the mortgage). … But I’ve seen this multiple times because they’ve been told they should pay off their mortgage.”
She said part of this thinking could be tied to experiences from a different era, not unlike a person who lived through the Depression perhaps being more frugal than others. When interest rates were high – say over 10% - it made more sense to get out from under a mortgage, Koepf said.
A 30-year, $100,000 mortgage at 3.5% nowadays ends up costing close to $162,000 in payments before the loan is paid off, well below the $316,000 for the same loan in the days of 10% interest rates.
Jesse Hurst
Impel Wealth Management, Cuyahoga Falls
“I’ve never met a client who has ever slept worse at night being debt free,” Jesse Hurst, a certified financial planner at Impel Wealth Management in Cuyahoga Falls, said in making the peace-of-mind argument for paying off a mortgage.
One advantage to taking care of the mortgage before retirement is stabilizing monthly expenses. Without car loans and mortgage payments, Hurst said he has clients living comfortably in retirement on $4,000 or so a month.
“I have found having success in retirement is having enough to do the things you want to do,” he said.
He said a common mid-point decision time on a mortgage is when parents are putting together plans to pay for their children’s education.
“We have had clients that have taken one side or another on that,” Hurst said. “Some have said instead of paying down on a mortgage, they put money into a 529 (college savings plan with tax benefits). … Others aggressively pay down a mortgage to create cash flow for college” costs.
Hurst said having a mortgage can make more sense for young adults, say in their 30s, who trade off a lower mortgage payment in exchange for being able to put more money into their retirement accounts with years to grow.
“It’s a matter of making sure you understand the numbers and planning,” he said.
Sarah Hannibal
Walden Wealth, Solon
Sarah Hannibal, a chartered financial analyst and co-founder of Walden Wealth in Solon, said she is “generally a fan of paying off a mortgage.”
She points out that because of tax law changes, far fewer people are itemizing deductions now, wiping out the tax benefit for mortgage interest payments. Hannibal said that after the standard deduction was doubled as part of the 2017 tax overhaul plan, the share of itemizers on federal tax returns dropped from 31.1% to 13.7%.
Another reason to make use of cash for mortgage payments is that interest rates on cash accounts are not keeping up with inflation, so the value of your money sitting in bank accounts actually is shrinking.
Hannibal said she and her colleagues focus on creating debt-free retirement plans. “Paying down your mortgage earlier gets you closer to that goal.”
But, in explaining her reasoning, she said eliminating a mortgage is not the sole objective; other things take priority.
“After extinguishing credit card, auto and student debts, it is time to think about accelerating mortgage payments,” Hannibal said.
She notes, as others did, that a major factor is an individual’s risk tolerance.
“If you have an average to higher risk tolerance, over the long-term, a diversified portfolio will likely outperform your mortgage rate. This is why some advisers will never recommend paying down a low rate mortgage early. (But) the uncertainty about returns is why investing involves risk,” Hannibal said.
“If you are risk averse, paying down your mortgage is going to feel better than putting money into the markets.”
Rich Exner, data analysis editor, writes cleveland.com’s and The Plain Dealer’s personal finance column - That’s Rich! Follow on Twitter @RichExner. See other data-related stories at cleveland.com/datacentral.
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