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Is It Time to Pay Off Your Mortgage?

Consider the pros and cons of eliminating a mortgage vs. increasing other investments.

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It’s a great feeling to pay off a debt—especially a large one such as your mortgage balance. Wiping the slate clean can have a number of nice advantages: fewer monthly bills to pay, which means more money at the end of each month to use for other needs and wants.

But should you use a chunk of your savings to eliminate your mortgage, or instead use these funds for adding to your investment and retirement-savings portfolio?

The answer can depend on several important factors.

Allocating Money for Maximum Benefit

There has been a long-standing debate among both consumers and financial advisors regarding whether it is better to pay down debt or add to savings and investments. There is really no clear-cut answer that works for everyone across the board.

For instance, if your primary financial goal is to maximize wealth, then adding money to your investment or retirement portfolio may be the better alternative. Going this route can also help you to keep a “cushion” for emergencies, because accessing money from a bank or brokerage account is typically much faster and easier than pulling money out of the equity in a property. (In fact, taking out a home-equity loan will usually carry interest and closing costs that could range from 2% to 5% of the loan amount.)

But a mortgage payoff can also eliminate one of the largest tax deductions available to consumers who are homeowners. In 2021, you may deduct interest expenses of up to $750,000 of mortgage debt on your income-tax return. (However, doing so can force you to forgo the standard deduction of $12,400 as an individual tax filer, or $24,800 if you and your spouse file your taxes jointly.)

On the other hand, paying off your mortgage could eliminate a hefty monthly payment from your budget. This, in turn, can allow you more financial “breathing room,” especially if you are facing a potential job loss or other reduction in income.

Good Debt versus Bad Debt

When deciding whether to take on more financial obligations or reduce your balance(s), it is important to know whether the money you borrow is “good” or “bad” debt. As an example, loans for items that quickly depreciate—such as a new car—are typically considered bad debt.

Racking up credit-card balances is also a negative, because the interest rate is usually in the range of 20 percent or more. So unless you pay off your card balance every month, this high-interest debt can increase exponentially over time, causing you to pay much more for the purchases you make.

In other cases, it might be wise to take on “good” debt. For instance, if you purchase a rental property, a mortgage could be used as “leverage” for an income-producing asset that can also increase the equity that you have.

In addition, the interest that you pay on a home mortgage for your primary residence is typically tax deductible. If you take out a home-equity loan and use these funds for home improvements, you may be able to deduct the interest that you pay for improvements.

With interest rates currently at historic lows, it could make sense for you to refinance your home and lower your monthly payment and/or pull money out for other needs, such as paying off high-interest credit-card balances, adding to your retirement investments, increasing the amount in your emergency fund, or even paying down some of the principal balance you owe on the mortgage. In this case, though, be sure that you plan to remain in the home for at least long enough to break even on the cost of refinancing the loan.

Before You Make a Decision

Before you move forward with a mortgage payoff, there are some housekeeping items to consider, such as answering the following questions:

• Do you have an emergency fund in place? If so, does it contain enough for at least six months of living expenses?

• Do you have other high-interest debt balances (such as credit cards) that are still in place (and costing you approximately 20 percent in interest charges)?

• Have you made your annual IRA (Individual Retirement Account) contribution for the current year? If you are age 49 or younger, you can contribute up to $6,000 this year, and up to $7,000 if you’re age 50 or older.

• Are you contributing the maximum amount to your employer-sponsored retirement plan, such as a 401(k)?  For 2021, you can contribute up to $19,500 if you’re not yet age 50, and up to $26,000 if you are 50 or over.

• Would it make more sense to refinance your mortgage (and possibly take some cash out), as interest rates are currently at historic lows?

• Will the return on other investments beat the interest-payment expenses on your mortgage?

• Will you still have ample cash available, or will paying off your mortgage drain your available savings?

• Is there a prepayment penalty for paying off your mortgage balance early?

Putting Your Plan in Place

Before you commit to paying off your mortgage—or  adding to your investment portfolio—you may want to discuss all of your options with a financial advisor who can review your overall situation and objectives. That way, you will be better able to compare the short-term and long-term benefits (or drawbacks) of either scenario.

In addition, working with an advisor who is knowledgeable about issues that pertain to the LGBTQ community can provide an added benefit, because various laws regarding same-sex couples can also be factored into your overall plan.

For information on Certified Financial Planner practitioners in your area, visit letsmakeaplan.org or visit midtownfg.com/lgbtqplus.10.htm.

This article appears in the April 2021 edition of OutSmart magazine.

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Grace S. Yung

Grace S. Yung, CFP, is a certified financial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston and was recognized as a “Five-Star Wealth Manager” in the September 2017 issue of Texas Monthly.
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