OAK STREET ADVISORS
  • HOME
  • SERVICES
    • Financial Planning
    • Tax Planning
    • Fiduciary Investment Management
    • Small Business Planning >
      • Business Retirement Plan Advisory
  • ABOUT US
    • WHAT IS A FEE ONLY ADVISOR?
    • FREQUENTLY ASKED QUESTIONS
    • OUR TEAM
  • BLOG
    • BLOG
  • SCHEDULE AN INTRO CALL
  • CONTACT A FINANCIAL PLANNER
  • FORM ADV PART 2

NEWS YOU CAN USE

When Should You Pay Off Your Mortgage?

1/22/2018

 
Carrying mortgage debt can be a contentious subject among financial planners. Some look at the leverage as an opportunity to build net worth. Others see mortgage debt as merely a necessary evil.  Often clients believe the mortgage interest deduction is valuable, but with the new income tax rules effective January 1, the deduction is limited for some and worth less for others.
So when should you try to be mortgage free?

Certainly, by the time you plan to retire.  I have given this advice to everyone who has the means to do so, and to a person, they have always commented that it was the best advice they ever received.  The reason has little to do with money, but everything to do with peace of mind. Not having the expense of a mortgage often reduces your need for significant cash flows. Being mortgage free also means that if push comes to shove, how much does it really take to live each month?  Your basic expenses are then whittled down to food, energy, medical, and insurance expenses.

Retirement is also the point in your life where growing your net worth takes a back seat to generating income.  I explain to clients that the easiest and safest way to earn 4% on your money is to avoid paying 4% for your money.  Paying off a mortgage can be compared to purchasing a bond with a yield equal to your mortgage interest rate.
​
I like to illustrate the value of paying off your mortgage in a very simple way. Below is a chart of the annual payments for a $250,000 mortgage at 4% interest.  We can ignore escrow amounts, because that covers expenses that will continue regardless of whether or not you pay off the mortgage debt.
Picture
Cash flow expense is simply the mortgage payments for the year divided by the payoff amount, or if you had the cash available to pay off the mortgage how much cash flow that money would have to produce to cover your mortgage payment.

You can see in this example that by year 15 the amount of money needed to pay off your mortgage would need to produce returns close to the historical equity market rates to be an even trade-off. By year 20 of a 30-year mortgage, or around the time many people are reaching retirement, the return on cash needed to make your mortgage payments has reached double digits.  
If you were retiring at that point and had $117,886 available in a taxable account I would encourage you to use that money to pay off your mortgage.  With a cash on cash return of over 12% the odds of earning a higher return on that money is slim, and it gives you an extra ten years of a less stressful retirement.

I once had a planning client come to me complaining that low CD rates were cutting into their lifestyle.  The client felt they needed more income, but they were very risk averse.   For them using the $100,000 to pay off their mortgage saved them from having $9,000 in annual expenses and did so without exposing them to any investment risk at all.
​
Every situation is a bit different, but you should challenge your assumption that carrying mortgage debt in always a good strategy.

Comments are closed.

    Archives

    November 2022
    September 2022
    November 2021
    September 2021
    July 2021
    June 2021
    February 2021
    January 2021
    December 2020
    November 2020
    October 2020
    September 2020
    July 2020
    June 2020
    March 2020
    February 2020
    January 2020
    November 2019
    October 2019
    September 2019
    August 2019
    July 2019
    June 2019
    April 2019
    March 2019
    February 2019
    January 2019
    December 2018
    November 2018
    October 2018
    September 2018
    August 2018
    June 2018
    May 2018
    April 2018
    March 2018
    February 2018
    January 2018
    December 2017
    November 2017
    September 2017
    June 2017
    May 2017
    March 2017
    February 2017
    January 2017
    December 2016
    November 2016
    October 2016
    September 2016
    August 2016
    July 2016
    June 2016
    May 2016
    April 2016
    March 2016
    February 2016
    January 2016
    December 2015
    November 2015
    September 2015
    August 2015
    June 2015
    April 2015
    March 2015
    February 2015
    January 2015
    December 2014
    November 2014

    Categories

    All
    401k
    403b
    529 Plans
    Annuities
    Behavioral Economics
    Bonds
    Budget
    Charity
    College Planning
    Credit
    Credit Cards
    Crypto Currency
    Debt
    Economics
    Estate Planning
    Federal Reserve
    Fiduciary
    Financial Planning
    Goals
    Gold
    HSA
    Income Tax
    Income Tax Planning
    Insurance
    Interest Rates
    Investing
    Investments Expenses
    IRA
    Jobs
    Life Insurance
    Real Estate
    Retirement
    Retirement Income
    Risk
    Rollover
    Roth IRA
    Savings
    Social Security
    Special Needs
    Stocks

    RSS Feed

  • HOME
  • SERVICES
    • Financial Planning
    • Tax Planning
    • Fiduciary Investment Management
    • Small Business Planning >
      • Business Retirement Plan Advisory
  • ABOUT US
    • WHAT IS A FEE ONLY ADVISOR?
    • FREQUENTLY ASKED QUESTIONS
    • OUR TEAM
  • BLOG
    • BLOG
  • SCHEDULE AN INTRO CALL
  • CONTACT A FINANCIAL PLANNER
  • FORM ADV PART 2