“Home is where the heart is.”

~ Gaius Plinius Secundus, a Roman philosopher better known as Pliny the Elder

The Oxford Dictionary’s definition of the popular idiom reads “Your home will always be the place for which you feel the deepest affection, no matter where you are.” The website Quora.com (which advertises itself as “A place to share knowledge and better understand the world) explains that the popular proverb is commonly interpreted one of two ways:

Firstly, it can mean that wherever our loved ones are, that is our home. Thus, wherever a person’s heart is will be our true home. Thus, no matter where someone was born or grew up, their real home is the place that they care about most in the world. This place may or may not be the place that they grew up in.

Secondly, it can mean that our love (our ‘heart’) is focused around the family home. A person’s heart will always be at home. This means that their love, affection and fond memories will always be tied to the place that they live.

Note: There are differences of cause and effect in each interpretation. In the first, love makes us feel at home. In the second, home makes us feel love.

Should We Pay-Off Our Mortgage?

One of the questions that we get asked often is whether or not someone should pay off their mortgage before they retire. Is it better to withdrawal from saving in order to be debt free, or is it better to invest the savings instead. It’s a great question, and a fair one at that.

As with so many conundrums in our financial life, the answer is often “it depends.” There is no black-and-white answer to whether you should pay off your mortgage or not. It’s a personal choice, and one with pros and cons that each individual must weigh individually.

For the sake of everybody reading this, I feel it is important to disclose my personal feelings on the matter. I tend to lean towards being debt-free. I personally do not like debt, or the feeling owing anybody anything. My sense of independence would be jeopardized if I feel like I’m financially obligated to anyone other than my family and my clients. Therefore, I would say that I probably am biased towards paying off your mortgage versus carrying debt into retirement. Even with the compelling “investing the money for return” argument I just don’t feel good about it. That said, I will try to be balanced on the pros and cons discussion.

Pros (Pay off your mortgage):

  1. It’s Good for Your Soul: For many folks, paying off your mortgage is an emotional relief. It may make them feel good and in control to own their home free and clear. Not have to worry about a financial obligation to the lender is liberating. If you were the type who views your house as a home, and not as an investment, it’s likely that you’ll enjoy being mortgage free.
  2. One Less (BIG) Bill Each Month: For many, their mortgage is likely their largest bill they have to pay each month. As folks enter retirement, health care may begin to jockey for this position, but it is still foreseeable that their mortgage takes top prize for the biggest burden. Planning a successful retirement often comes down to a balancing act of cashflows. Income from retirement income sources like social security and pension as well as withdrawals from retirement assets like workplace retirement plans and personal savings must be balanced against outflows to cover basic living expenses plus additional spending on life experiences. Then there’s the inevitable need planning for inflation, and the corrosive effects of taxes. Eliminating what potentially could be your largest monthly bill can make a big difference when it comes to balancing cashflows in retirement.
  3. A Guaranteed Rate of Return: There is a guaranteed rate of return when you are no longer carrying interest payments on your mortgage. If your mortgage balance is $100,000, and your interest rate is 4% you have $4,000 walking out of your life. Assuming you have it on hand, taking $100,000 out of the bank to pay off your mortgage would guarantee a 4% rate of return on your balance sheet because you no longer have that money going out the door to a lender. Without taking risk, where can you get a guaranteed rate of return equal to or greater than your mortgage interest rate?
  4. Increased Discretionary Cash Flow: When your mortgage is paid off the money previously obligated for principle and interest is now freed up cash flow. They may now be directed somewhere else. That money could be directed toward savings and investments. It could also be leveraged to increase your lifestyle, or to cover some other expenses that you have at that stage in your life.

Cons (Pay off your mortgage):

  1. It’s Cheap Money: One of the primary arguments for carrying a mortgage rather than paying it off is a two-part equation. Part one of the argument is that it is “cheap money.” In fact, it is likely the least expensive borrowing costs you incur experience in your lifetime compared to all other borrowing options like credit cards and other consumer debt.
  2. Higher (Non-Guaranteed) Investment Returns: The second part of the argument is that the money could be invested at a higher rate of return somewhere else. Most examples I found supporting this stance rely on historical market data. I found examples suggesting your money could be earning anywhere from a 6% rate of return invested in a balanced portfolio to over 9% based on historical SP500 data. From that perspective you would be better off investing versus paying off your cheaply acquired mortgage.
  3. Mortgage Interest Deduction: Mortgage interest payments are deducted against your taxes. Thus, paying off your mortgage means you lose a tax deduction. This has been another argument as to why folks shouldn’t off their mortgage. While it is still legal to deduct mortgage interest on your taxes, the impact of the Tax Cuts and Jobs Act of 2017 eliminates the effectiveness mortgage interest deduction for the majority of Americans. In order to use the interest deduction, one must file an itemized deduction. With the increase in the standard deduction to $24,000 for a married couple ($26,600 for married couple both over 65 filing jointly), most folks will be claiming the standard deduction rather than itemizing.
  4. Wealth in Your Home Is Illiquid: The equity in your home is not easily accessible. If the market value of your home is $300,000, and it’s completely paid off do you have $300,000 worth of equity. But if you wanted to use even a fraction of that $300,000 for some other purpose its difficult. You would have to sell your home which could take months to find a buyer, not to mention the fact you have to find another place to live. You could potential access some of the home-equity through a home equity line of credit (HELOC), but now we’re back in the borrowing boat again so why pay off the likely lower interest primary mortgage in the first place?

While researching for this article, I poured over a fair number of articles written on the topic from differing viewpoints. Many of the articles addressed the pros and cons, but remained neutral on the which way was the right way to go.

I did however notice a trend in quite a few articles that lean towards retaining a mortgage and investing the rest of your money. Most of those articles are written by or in publications for folks in the financial services profession. I have a feeling there might be some bias and potential conflicts of interest at work here.

Potential Conflicts of Interest?

Articles Written By or For Professionals In The Mortgage & Real-estate Industry:

If you carry a mortgage, the lender earns an interest income. Therefore, it would seem that the lending industry has a conflict of interest with someone paying off their mortgage. They (mortgage industry) only get paid if there’s outstanding debt. If you pay off your mortgage you are no longer a customer.

Articles Written By or For Professionals In The Financial Services Industry:

The financial services industry makes money on commissions and fees. If you pay off your mortgage they can no longer use those dollars to invest in their products and charge fees. The mutual fund companies can’t have those dollars to invest in their funds, the commission broker can’t receive a commission and trailing fee, and the investment advisor can’t charge you a fee based on assets under management if your assets aren’t in investments that they manage. Therefore, there would seem to be a potential conflict of interest with paying off your mortgage

At Conflicts With My Peers

I’ll admit, I sometimes feel a bit like an outsider when having this discussion. I am a fee-based fiduciary advisor. I charge a fee for advice based on the investable assets that I manage for my client. It would financially be better for me to find a strong argument for investing my client’s money rather than encouraging them to pay off their mortgage. However, it often doesn’t feel right.

There are so many voices from my industry loudly claiming that paying off your mortgage is a bad financial decision.  They will come up with all kinds of analytical arguments as to why a person should carry a mortgage and invest their money wisely somewhere else. They will quote the tax deductions (neutralized by the Tax Cuts and Jobs Act for most), the cheap borrowing costs, and the historical rates of return when invested in marketable securities. They will passionately argue why it doesn’t make any sense to tie up your money in an I liquid assets at like a house.

There are many mathematical arguments online that lean towards maintaining a mortgage, and investing your money over a long-term basis (although I question many of the assumptions used to arrive at this conclusion). Fueled by low borrowing cost, and applying nearly a century of historical market returns to what may happen in the near future, these viewpoints make a compelling case. However, there are so many other factors that play into the decision as to whether to pay off your mortgage or carry debt into retirement.

What if your house isn’t a house, but rather it is your home? It’s the place your family gathers to celebrate good times, and to come together during the hard times? What if you don’t see it as an investment to be maximized, but rather a part of the family structure.

What if actual market returns over the next few decades are less than historical, or you are uncomfortable with the amount of risk necessary to make the case for investing rather than paying off your mortgage?

What if borrowing costs rise in the future (as they have in the past 2 ½ years). At what point is it no longer “wise” financial advice to carry the debt and invest instead?

In the coming newsletters we’ll address some of these questions and try to put theories to the test. Until then remember that for many, “Home is where the heart is.”

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