Mortgages are the most common personal debt in the U.S. Why? Because if you cover your mortgage based on the type of loan, generally, you will finance 80% of the home price. However, the sum of the mortgage is not only the price of the house, but the interest to be paid on the mortgage itself.
Everyone who has been through the pension registration process knows there is much to consider: investing, saving, anticipating medical expenses, etc.
There’s a question many people ignore: “Do I have to pay off my home mortgage before I retire?” The response is more complicated than you might think.
Advantages of Paying Off Your Mortgage
1. Peace of Mind
It’ll feel good to know that you no longer owe the creditor payments.
2. Less Money Down the Drain
Enjoy savings in your pocket instead of spending money year after year on home interest payments.
3. Financial Freedom
After paying off your mortgage—unless you have other debt—you have the financial freedom to pursue other activities, like starting another business.
Eliminating mortgage balances significantly reduces the risk of losing your home in the event you lose your job or experience unforeseen health problems.
5. Reduced Reliance on Uncle Sam
There is no guarantee that the tax deduction for the payment of interest and commissions will not be canceled over time.
6. Boost Savings
By not having a mortgage payment, you’re able to save even more. You can deposit additional money in a savings account, invest in diversified asset classes, and so on.
7. Mitigate the Unstable Real Estate Market
One of the biggest concerns for most homeowners, especially when recalling the Great Recession, is the effect an unstable real estate market can have on homeowners. The ability to keep up with mortgage payments during a severe financial crisis can be a massive burden.
Disadvantages of Paying Off Your Mortgage
1. Lesser Liquidity
Keeping the mortgage and the money you could use to retire, you create an ideal personal account balance. Yes, it’ll be one with different obligations (your mortgage), though equally one with multiple assets (cash). Eliminating the cash loan also limits your tendency to cope with unexpected expenses or investment opportunities.
2. Inflation Hedge
It will be paying off your current mortgage in future dollars, which will actually cost you less in real dollars for years to come. For example, if annual inflation is only 2% in the next 15 years, the last payment of $ 1,000 for a new 15-year fixed-rate mortgage will now only cost $743.
3. Less Mortgage Interest
Those nearing retirement are more likely to pay less mortgage interest, perhaps so little that mortgage interest and other price discounts, plus other deductions, are no more than standard deductions. (According to the Pew Charitable Trust analysis, less than half of all borrowers use reduced interest on mortgages.)
4. Borrowing Costs
When you chose to borrow against your home that has been repaid in the future, like paying off a new mortgage, it can be much more expensive. Interest rates, which have touched lows for more than four years, may start to rise in the coming years. A 4.5% increase in January interest rates on a $ 30,000 30-year mortgage with a single percentage point results in monthly payments of more than $128. Other types of loans, such as a basic home loan, generally charge a higher interest rate than a traditional mortgage.
5. Opportunity Cost
Even when you see your home as an investment—even if it is not liquid—the increase in the value of long-term residential properties follows other native portfolio investments. For instance, historical property returns are lower than stocks (not mentioning bonds at the investment level after 1970s).
Before the housing bubble and ensuing crisis, domestic property prices rose by about 6% between 1975 and 2002, compared to a 14% return on equities. If you transfer this money to your account at brokerage, it will most likely happen in 10 years.
What are your reasons for paying off—or not paying off—your mortgage?
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.