Mortgage or No Mortgage – The $64,000 Question

Written by Brian Tillotson and Karen Spence

This is one of the most debated and asked topics from our clients.  Should they pay off their mortgage or keep it?  It is the $64,000 question right now (did I age myself?) even though you probably have a mortgage much larger than that amount.   Well, the answer, of course, is … it depends!  Brian and Karen are going to discuss the advantages of both so you can make sure you choose the right decision for you.

Brian – Point:  It is just a numbers game …

It really is a simple math decision from my perspective, but I am a numbers guy.  Your net worth is the sum of many assets.  One of those is the equity in your home.  Another is the investments you must sell to pay off the mortgage.  Paying off a mortgage does not necessarily increase your net worth; it just means you have more of your net worth in equity and less in investments.  In fact, materially speaking, the moment you do it, your net worth doesn’t change.  You are just taking money out of one pocket and moving it to another.   The major question is which pocket will see the largest increase in wealth long-term.  Current mortgage rates are cheap money right now.   Per the Texas A&M Real Estate Home Index, home values in DFW increased approximately 5% per year from 2013 to the end of the 3^rd quarter 2020.  If you live in states like California or Florida the increase is probably higher.  The S&P 500, per Yahoo Finance, grew over 13% during that same period.   If you could only own one of those assets, your home or a portfolio of stocks equaling the S&P 500, which one would have increased your net worth the most?

It is true we have been riding a great stock market over that term, but we also have been riding a good housing real estate market over that period as well.  What happens when the market is down big one year, like 2012?  I don’t think it matters.  Are you making your decision based on a one-year timeline?  Since most mortgages are 15-, 23-, or 30-year decisions, we need to compare the growth in assets over those time periods.  I think you will be hard pressed to find a domestic market in which home values increased more than the market, even considering the sub 5% interest you can get on a mortgage today.

Karen – Counterpoint: Life Isn’t Always Numbers…

Emotionally speaking …  Paying off your mortgage early can give you peace of mind knowing that you will always have a place to live and you’re that much closer to being debt free.  Some people just don’t like the idea of owing money. If you’re one of them, that may be reason enough to pay off your mortgage early. Especially if it’s the only debt you’re carrying.

That said, there are “numerical” benefits too!

• You’ll save money on interest. The less time it takes you to pay off your mortgage, the less money you’ll spend on interest — it’s that simple.  Paying interest on a loan can be like earning a risk-free return equivalent to the mortgage interest rate.
• You won’t miss the itemized deduction. The standard deduction is so high now that most people don’t itemize.  This means that you don’t need mortgage interest to lower your taxes.
• You’ll reduce your monthly expenses. No mortgage payment equals flexibility.  Flexibility to spend money on other things (education, travel, fun, philanthropy).
• You’ll open your retirement options. This is big.  No mortgage can give you the option to retire early and/or spend more in retirement.  Freedom to retire early.  Freedom to travel.  Freedom to live more easily on a fixed income, stress-free.

More than likely, some kind of comprise may be the best approach.  Personally, my husband and I had this exact same debate.  I was actually on the financial side of the argument.  I am a financial advisor, after all!  “Let’s drag out that 30 year mortgage.  It’s cheap money!” However, after much discussion, we landed in the middle.  We have not paid off our mortgage completely yet, but we agreed to pay it off early so that, in retirement, we are debt free!

Deciding to pay off your mortgage or not can be overwhelming, but it doesn’t have to be.  Feel free to reach out to our advisors here at Virtus Wealth Management, having a professional in your corner to lean on is beneficial in making these decisions.