Should you pay off mortgage or not?
It depends — every situation is different. As an absolute certainty, reducing fixed expenses during retirement should be a goal. If not prior to retiring, then as soon as practical, work for a mortgage-free retirement. Think about it, uber-rich people miss one of life’s greatest pleasures, making the last mortgage payment. Even bringing it up for consideration means you are in a pretty good place, but sometimes people look at it cockeyed.
Yes, mortgage interest is deductible, but only as an itemized deduction. A dollar paid as interest does not reduce tax liability by a dollar. Higher-earners ($261,500/$313,800, single and married, filing jointly, 2017) have deductions phased out. For more pedestrian earners, increases in the standard deduction ($6,350/$12,700, single and married filing jointly) reduce the allure of interest deductibility. In states like Florida, with modest property tax rates and in today’s low interest rate environment, the standard deduction can be higher than itemized deductions.
Even when itemized deductions exceed the standard deduction, the benefit is often fractional. For instance, with $10,000 in mortgage interest and a $3,500 property tax bill, you can itemize, but the only benefit is from the excess over the standard deduction, or in this example, 6.3 percent.
Too often people make the analogy, aided and abetted by the financial services industry, that keeping money invested in stocks is better than paying off the mortgage. Granted the last few years, investing was the better choice, but during the first decade of the 21st century the S&P 500 had a negative return (-.9 percent). From 1968 to 1974, the S&P 500 lost 1.5 percent annualized, as well. I’m 61 years old, just three years and six months from Medicare, and stocks provided a negative return for over 25 percent of my time on this planet. Sometimes you eat the bear, sometimes the bear eats you.
Paying off a mortgage is guaranteed return, while investing is risky, there is no promise you will get your money back. A more appropriate comparison would be to compare the loan’s interest rate with a safe investment, not a risky one. For a recent case at Livingston Financial Planning the couple was paying over 4 percent on a home equity line of credit; they needed a swimming pool. Since their stock allocation was over 80 percent and both had steady employment zapping the HELOC was the more appropriate option. Show me where you can get 4 plus percent guaranteed … I’m waiting.
Temptation is the desire to do something unwise. Focusing on the deductibility of mortgage interest can tempt you to buying or building more home than you need. Paying off a mortgage reduces the amount available to bill asset management fees perhaps clouding an advisor’s opinion.
You can’t always get what you want, but Buz Livingston, CFP can help figure out what you need. For specific recommendations, visit livingstonfinancial.net or come by the office in Redfish Village, 2050 Scenic 30A, M-1 Suite 230.