Being debt-free is often seen as a financial goal, but here's a surprising twist: your financial planner might advise you to keep your mortgage.
Trinity Owen and her husband, residents of East Concord, New York, discovered this when they did some simple calculations. They compared the interest savings from paying off their mortgage early versus investing the same amount in the stock market for 25 years. The results were eye-opening.
"We were shocked to realize that paying off our mortgage early wasn't the best financial move," says Owen, a digital marketer. "We could have paid it off twice over with our investments, but we chose to keep the mortgage and invest instead."
So, why would a financial planner suggest keeping a mortgage?
The Benefits of Keeping a Mortgage
Firstly, keeping a mortgage provides flexibility. As Melissa Caro, a CFP based in New York City, points out, "If you pay off your mortgage, all that money is tied up in your home. It's no longer liquid and accessible."
Caro adds, "In case of an emergency or a major repair, you might find yourself borrowing again or selling investments, which could trigger taxes."
Another advantage is the potential tax deduction for mortgage interest. "The higher your income, the more valuable this deduction becomes," explains Tyson Sprick, a certified financial planner. "It can make a significant difference on your tax returns."
When Paying Off Early Makes Sense
However, holding onto home debt isn't always the best strategy. If you have a high-interest mortgage and the cash to pay it off early, your financial planner might encourage you to do so. It's also advisable if you're nearing retirement, as owning your home outright can provide financial security during this life stage.
The key question, according to Sprick, is whether you have enough cash to pay off your mortgage while also pursuing other financial goals. "Can you attack your home loan and still put money away for college or maintain your emergency fund? If paying off the mortgage leaves you with nothing in the bank, it's better to wait."
The Emotional Side of Debt
Financial decisions are not always rational. Money is deeply tied to emotions and feelings of control. Some people prioritize the emotional relief of being debt-free over the potential financial gains of keeping a mortgage.
"For many, living debt-free is empowering. It's about financial freedom and peace of mind, beyond just the numbers," says Josh Brooks, a CFP with Exponential Advisors.
However, prioritizing emotions over financial calculations might mean earning less, having less liquid cash, and making slower progress towards other financial goals.
"Some people say, 'I just want it gone. I want that feeling of not owing anyone.' From a financial perspective, it might not be ideal, but life isn't just about spreadsheets," Sprick adds.
The Bottom Line
Everyone's financial situation is unique, and it's crucial to make decisions that align with your personal goals. If you're unsure, consult a financial professional.
The good news? If you have a low-interest mortgage, you don't need to stress. Keeping it might be a smart move, as financial planners often suggest.
For Owen and her husband, keeping their mortgage has allowed them to invest in stocks, local real estate, and grow their entrepreneurial education platform, Permanent Jewelry Center.
"Our future would have looked very different if we had paid off our mortgage instead of using that money for what we believe are better investments. This mindset has completely changed our perspective on paying interest," Owen concludes.
