Rethinking Mortgage Payoff

Authored by Kendall Benner, CFP®

Numerous individuals and families associate financial independence with owning their home outright by retirement. We often hear questions along the lines of: “should I pay off my mortgage?” or “should I pay extra to my mortgage?” Below, we'll explore things you should consider before expediting a mortgage pay off.

If there is a surplus of income, you must assess the impact of allocating those funds towards a mortgage versus other financial goals. Before committing to early mortgage repayment, we recommend considering the following:

1. Do you have a sufficient emergency fund?
A sufficient emergency fund for a typical family is 3-6 months of fixed living expenses to cover any unexpected expenses or job loss. Emergency funds should be in a savings account with a high interest rate, if possible.

2. Do you have other debt that should be prioritized?
All consumer debts, such as credit cards and personal loans, should be cleared first to reduced interest expenses. Additionally, if you have student loans should review them to ensure you are on the appropriate repayment schedule.

3. Are you saving enough for retirement?
As a rule of thumb, one should be saving at least 15% - 20% of gross income towards retirement to be on track to retire by age 65. You should have a good sense of if you are trending towards having enough saved for retirement before making your decision.

4. Do you have other goals that should be a higher priority?
A plan for saving for children’s education expenses and other goals might be a higher priority. Be sure to make a list of all your goals and then rank them in order of importance. Knowing all your financial goals and how pursuing one might impact achieving another is an important tradeoff to understand.

If those categories are being appropriately funded or planned for, allocating extra cashflow to a mortgage may be appropriate, but there are some additional considerations.

5. What is your mortgage interest rate?
With recent interest rate hikes impacting both mortgage rates and fixed-income investments, it is important to weigh the return impacts. If your mortgage rate is below the average rate for fixed-income investments, there may be more to gain in the long run by redirecting funds towards investments rather than accelerating a mortgage repayment.

a. For example, currently there are money market accounts that are yielding at or near 5%. If the mortgage rate is lower than 5%, the money being earned from the money market account is more than what is being paid in mortgage interest.

6. Consider future liquidity needs.
While eliminating mortgage debt brings a sense of security and outright ownership of a property, it also means a significant portion of wealth becomes illiquid, tied up in the value of a home. To gain access to the equity, it will involve opening a line of credit or loan with a potentially higher interest rate than the original mortgage. This lack of liquidity can hinder the ability to leverage those funds for other investments or emergencies.

7. Is there a tax advantage to maintaining your mortgage?
With the Tax Cuts and Jobs Act, the impact of mortgage interest deductions was significantly reduced. However, this tax cut package is set to expire at the end of 2025 and the ability to deduct mortgage interest may once again play a key role in reducing taxable income for many people.

Paying off one’s mortgage is a great financial goal. To ensure the decision aligns with all financial goals and objectives, it's imperative to weigh the opportunity costs involved. For those considering paying off their mortgage early, consult with a financial advisor to determine if it's the right decision for you.

Opinions expressed in the attached article are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Prior to making an investment decision, please consult with your financial advisor about your individual situation.