By Thomas Britt
Currently the housing market is booming, thanks to record-low inventory, low interest rates, and high demand, (1) so many of us have houses on the brain. It’s no secret that many joys come along with being a homeowner, but there’s also no denying the hefty price tag. As most of us are unable to purchase a house in full, we are encumbered with a mortgage as soon as we lay down the welcome mat. This debt is unavoidable, so now the question becomes how to handle it moving forward.
The basics regarding debt are common sense: debt reduction is a healthy financial goal (especially when it comes to high-interest debt such as credit cards or student loans), and it’s important to minimize debt for plenty of reasons. But do these principles also apply to mortgages? Is it better to put every extra dollar toward your mortgage or invest that money instead? Like most financial decisions, the answer will depend on your unique situation.
Let’s discuss some pros and cons of each strategy.
The Best Use of Your Funds
If you are considering paying off, or paying extra on your mortgage, we can assume you have extra cash each month, or a lump sum you need to make a decision with. Of course, leaving additional funds sitting in a savings or checking account where you’re earning less than a percent of interest would never make good financial sense. You want your money to work for you, so the question to ask is, “What option will give me the biggest payoff?” Many clients choose the simple comparison between their mortgage rate and the rate of return on their investment or portfolio. However, the decision goes far beyond that. Paying down your mortgage is akin to investing more into your home. How will your home’s appreciation compare to that of your portfolio? What role will that appreciation play in your long-term goals?
Like most financial decisions, there are plenty of factors that could affect the outcome. And as we all know, even the best estimates aren’t guaranteed. It is important to run a thorough analysis and consider a variety of factors: the current interest-rate environment, potential taxes on new investments, the loss of mortgage interest deduction (if applicable), your risk tolerance, private mortgage insurance, among the other elements of your financial life. An experienced financial planner can provide the needed guidance and direction when it comes to such a decision.
Weigh Your Options
There are some pros and cons to each choice that go beyond the raw math. Liquidity is a significant pro for investing since you’ll have greater access to the funds in case of an emergency or for your other financial goals. By placing the money toward your mortgage, thereby investing more in your home, your options become more limited. The only way to access those funds would be to sell your house or refinance your mortgage.
The advantages to paying down your mortgage are obvious. The additional cash flow created from the savings can be redirected to your longer-term goals or strengthen your monthly budget once retired. The savings created could also potentially be used to offset your healthcare or long-term care coverage once retired as well.
Is Being Debt-Free Important to You?
Paying off your mortgage can have other non-financial benefits as well. Transitioning into retirement debt-free often provides clients with peace of mind at a time when they are feeling financially vulnerable. Living solely off one’s investments or Social Security can be intimidating, and having one fewer obligation can help with that transition. So while the numbers don’t lie, they often don’t tell the whole story.
It’s Not All or Nothing
So after considering these options, which is the best for you? For some, a combination of these two choices may make the most sense. This could mean adding more money to each mortgage payment to bring down the principal while still putting the bulk of your extra money toward other investments.
Before taking any action, it’s important to take several variables into consideration. And as with any major financial fork in the road, it’s always wise to first consult with a financial planner. So before you pay off your mortgage, we at Benchmark Wealth Management would love to help you evaluate your options. We can provide personalized financial planning advice, and maybe even show you alternative investment strategies you hadn’t considered. After all, our goal is for you to enjoy your home without worry keeping you up at night.
To see if we are the right fit to help you navigate this financial decision—and all the others on the road to your ideal financial future, please call 860.434.6890 or email me at firstname.lastname@example.org to arrange a consultation.
Thomas J. Britt is managing director of Benchmark Wealth Management, LLC, with 20 years of experience in the financial industry. He specializes in executive financial planning, retirement planning, investing, as well as the management of trusts and endowments. Thomas is a CERTIFIED FINANCIAL PLANNER™ (CFP®) professional and holds the Master Planner Advanced StudiesSM (MPAS®), Certified Investment Management Analyst (CIMA®), and Chartered Retirement Planning Counselor (CRPC®) designations. He earned a Bachelor of Science in Finance from the University of New Haven, an MBA in financial technology from Rensselaer Polytechnic Institute, and a Master of Science in Personal Financial Planning from the College for Financial Planning. He is also a proud veteran of the United States Navy Submarine Force. Learn more about Tom by connecting with him on LinkedIn.
Additional information, including management fees and expenses, is provided on our Form ADV Part 2, available upon request or at the SEC’s Investment Advisor Public Disclosure site, www.adviserinfo.sec.gov/firm/160192
Securities offered by Registered Representatives through Private Client Services, Member FINRA, SIPC in the following states: AZ, CA, CT, FL, KY, MA, ME, MI, MN, NH, NJ, NY, RI, TX. (Securities-related services may not be provided to individuals residing in any state not previously listed) Advisory services offered through Benchmark Wealth Management, LLC a Registered Investment Advisor. Benchmark Wealth Management and Private Client Services are unaffiliated entities.