As I sat down to write this article, the title above popped into my mind. I then began to wonder about the original version of the quote: “To be, or not to be; that is the question.” A quick Google search revealed that it is the first line in a soliloquy from Shakespeare’s Hamlet.
My high school English teacher, who is now a client, is probably shaking her head as she reads this. So, I might as well admit I had to look up “soliloquy” too. Dictionary.com defines “soliloquy” as: “An utterance or discourse by a person who is talking to himself or herself or is disregardful of or oblivious to any hearers present (often used as a device in drama to disclose a character’s innermost thoughts).”
Why am I telling you this? Because there’s often a lot of ruminating and inner dialogue when it comes to mortgages.
Sure, people wonder, “What is bitcoin?” “How do I pay less taxes?” and “How do I retire early?” In my experience, however, the top question by far is, “Should I pay off my mortgage early?”
There is no easy answer because the decision depends on many variables:
1. Your current mortgage rate
2. Whether or not your mortgage interest can be deducted as an itemized expense
3. How much longer you have to pay on your mortgage loan
4. When you plan to retire
5. What your level of risk tolerance is
6. How much money you’ll have going into your future retirement
7. Whether you like known outcomes, or you prefer to gamble a little
Numbers vs. emotions
As a numbers guy, I can show most people that keeping a low-interest rate mortgage makes more sense than paying the loan off early with a lump sum of cash. That is because you can invest the cash to earn a higher rate-of-return in the markets long term (as opposed to saving some interest expense each year going forward). If you can get 6-9% in the markets, over a long period of time, why would you pay off a 3¼% mortgage that might be tax deductible?
The biggest reason is the lack of a guarantee. It is hard to throw “guaranteed” around in the investing world. Only a few investment products can put that word anywhere; some include FDIC-insured products like: CDs, certain life insurance offerings, U.S. Treasury bonds, and a few other items.
Paying off your mortgage generates a GUARANTEED rate of return. (I am the compliance officer at my firm, so I can use that word in this context.)
Given all of this, some people waver when trying to decide whether or not to pay off their mortgage early; others feel it’s a no brainer.
For example, about a year ago, a client came into my office and began to dance a little jig. I asked what he was doing and he explained that he was doing his “I just paid off my mortgage and no longer owe anyone anything!” dance. For him, not having that loan anymore was hugely important; getting rid of it provided incredible peace of mind.
A quantitative and qualitative decision
So, how do you stop mulling over the choices and decide what is best for you? Here is a good starting point.
You should probably pay off your mortgage if you:
1. like GUARANTEED stuff
2. don’t want to owe anyone anything
3. don’t want to stay on top of making payments
4. don’t want to worry about a mortgage payment if you ever get laid off or become disabled
You should probably keep your mortgage loan (and invest the cash you would use to pay it off) if you:
1. have the stomach for stock-market volatility
2. have the ability to budget for your mortgage payment
3. have a low mortgage rate
4. like to maximize your growth potential
In many cases, the answer is clearer after doing this analysis.
How I handled this in my own life
In full disclosure, I paid off my mortgage about three years ago. My wife and I bought a house in 1995, rolled that equity into our current house in 2002, refinanced down from a 30-year to 15-year mortgage, and then refinanced again down to a 10-year mortgage. About eight years into the 10-year mortgage, I paid off the balance for my wife’s main Christmas present. (She was ecstatic!)
You see, my wife and I are comfortable taking risks in the market, with regard to our investment portfolio; however, we also want to own our house free and clear. Now, when a pandemic happens or something crazy occurs in our life, we don’t have to worry about the added stress of making a mortgage payment.
The decision isn’t one-size-fits-all
Which option would bring you inner peace when it comes to paying off a mortgage early? If you still aren’t sure, we’re here to help you decide – and achieve – whatever will bring you peace of mind.
To get the ball rolling, simply consult your Redwood advisor. We will help you figure out the path that’s best for you.