Your Mortgage—Candy Or Coal?

23107171_sI simply love this time of year. One of my favorite things to do during the holidays is to drive through neighborhoods with Jill and our girls to look at all the holiday lights. We each have our favorites. Jill loves the all-white, classic look. For my girls, on the other hand, the brighter, flashier, and more covered a house is with colors, the better.
Whether it’s the decoration, the inherent warmth, or the family gatherings that take place in them, our homes seem to be the star of the holidays, and, accordingly, the subject of so many holiday songs. But, as a financial guy, I cannot admire homes without thinking about mortgages (bah, humbug, right?).
Nearly every homeowner has encountered the burden of a home mortgage and would love to pay theirs off as soon as possible. Many contemplate paying off their mortgages early to reduce their expenses during retirement. A critical component of retirement planning is anticipating future income and expenses. Taking mortgage payments off the debit portion of that equation can boost the bottom line significantly.
Another reason many people rush to pay off their mortgages is to use the money they would otherwise be spending on interest to fund their retirement accounts. Turns out, that might not be the most effective strategy to accumulate wealth. With interest rates as low as they are, an individual’s financial future might be best served by holding on to the cheap debt of a mortgage and using that money, instead, to pay off higher interest debt, or to compound in a sound investment strategy.
I often explain to my clients that I will never just tell them what they need to do; that would be too easy. I want to teach them the questions to ask and the issues they need to consider, so they can make sound financial decisions that are right for them. So, Cutter Family Finance readers, if you are thinking about paying off your mortgage early, here are a few things to consider as you weigh your options, so you, too, can be empowered to make the decision that is right for you and your family.
One of the first things you should do if you are contemplating paying off your mortgage, is to determine whether you are contributing the maximum allowable amount to your retirement accounts. A good advisor can help you figure this out. If you have not maxed out your contributions, you might want to take advantage of the chance to do so before you hit your retirement years. On the other hand, if you have reached the limit on your contributions, your mortgage might be the next best use of your funds.
But before making the decision to pay down your mortgage, you should consider how your taxes will be affected by doing so. If you have been able to significantly minimize your federal taxes by deducting your mortgage interest payments, you must include that benefit in the calculation of the cost of your loan.
Another thing to consider before paying off your mortgage is whether you have sufficient liquid assets. We’ve stressed in past Cutter Family Finance columns the importance of having an emergency fund for a rainy (or snowy) day. If you do not have a few months’ expenses set aside in accessible funds should you need some, it is a good idea to hold back on those extra mortgage payments in order to accumulate cash in such an emergency fund. Owning your home will not help you to pay your bills if you lose your job or have an expensive repair.
Any financial decision is never complete without considering opportunity loss. If you pay off your mortgage, are you missing out on an opportunity to use your cash more effectively? As I mentioned earlier, interest rates on mortgages are relatively low, considering that in 2014, the variable APR on the average credit card is over 15 percent. Accordingly, paying off credit card debt with an interest rate higher than your mortgage should take precedence over paying off your mortgage. (Let me be clear, you always want to pay your mortgage before your credit card, but to the extent you are paying extra, it may be beneficial to pay down your credit card balance before your mortgage.) If, however, you do not have debt with high interest rates, then consider whether you can depend on market returns higher than the interest rate on your mortgage. That will give you a good indication of where your money is most useful.
Finally, consider the most obvious reason that people pay off their mortgages—peace of mind. There is an inherent pride in owning your home outright. Although I often preach against making financial decisions based on emotions, if you’ve considered all the other effects of this decision and have not found an overwhelming reason to do one thing or another, peace of mind can play an important role in your decision. If paying off your mortgage will help you sleep at night, that could be one of the most valuable assets you have.
So as you admire the lights on your trim, your halls decked with holly, and rooms filled with the warmth of cheer this holiday, think about the mortgage debt hidden in the floorboards. It may or may not be the burden that you think it is.
I want to wish all of you, Cutter Family Finance readers, a happy holiday. As 2014 comes to an end and we enter into 2015, begin to think of what you want to accomplish in the New Year to get your financial house in order. If you have already begun, great job! If you have not empowered yourself yet to make these important decisions, take action and make the commitment. Commitment requires change, and change often comes with pain. But growth, in life, only comes through pain. As I tell my kids at every new challenge of life, “You can do this!” . . . and you can.
Be vigilant and stay alert, because you deserve more.