Is it wise to payoff a mortgage early?

Scott Hovden MBA, RICP

Often, clients nearing retirement age will seek your advice about home ownership versus investments. The common question is: should I pay down my mortgage or invest the money?

As an advisor and former credit bureau executive, I always err on the side of caution. I recommend retiring the mortgage as quickly as possible. At 3.5%, it’s very tempting to delay repayment of the mortgage in lieu of getting 7.5% to 8% returns in the markets. But the problem is as your time horizon toward retirement shrinks, so does the opportunity to recoup losses in the event of a market correction.

As we age, the calculus of risk changes and unforeseen events could impact the ability to reduce a large mortgage balance. Disability or health issues can become stark realities that ruin a sound investment plan.

For example, say you’re at age 55 and carrying a mortgage of $150,000 with 15 years left. If you have a million dollars in the bank and owe $150,000, that’s a no-brainer. You simply write the check, and it is paid. However, most of us don’t have a million dollars in the bank. The other problem is the payment comfortably fits into the budget. Cash flow restrictions make it difficult to put more of the monthly budget into reducing the mortgage. Is there an alternative? The answer is yes.

Here’s how it works. Let’s say you’re 55 years of age and have a $300,000 home with a $150,000 mortgage with a 15year term. The rate is a comfortable 3.25%, with a monthly payment of $652.81, before taxes. At this rate, you’ll be scheduled to retire the mortgage at age 70. Your total payments will be $85,011.41. Using a bi-weekly mortgage strategy, your total payments will result in savings of $11,780.94 or $73,230.47 in total—a time savings of nearly 18 months. Quite simply, what you are doing is making a total of 26 payments in a year instead of 24.

In addition, the good news is unless restricted in the mortgage contract; most banks have the capability to allow you to do this.

Just think what one can do with an additional $652.81 per month in disposable income. For most of us, it’s an extra trip to a warm climate once a year or helping with your grandchildren’s college fund.

More importantly, the home is a retirement asset that can be used for additional income or sold to retire in a more manageable lifestyle. Being debt-free gives so many options to a client that the advisor cannot overstate its importance.