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Paying Off Your Mortgage Early

A past client of mine called the other day to ask whether it made sense to pay their home off early or just keep putting extra money into their retirement savings. I told her, “That depends on what your goals are. When your mortgage interest is below 4% and you’re making 6-10% in the stock market, it probably makes financial sense to keep putting that extra money into your investment account.”

In this case, she was worried their home loan wouldn’t be paid off by the time they retire in 18 years. I asked her, “If you retire and you still have a mortgage, will it keep you up at night?” She confessed that it might worry her to still be paying a mortgage while on a fixed retirement income. I asked her, “Do you know what your loan amount will be paid down to at that point when you retire in the year 2038?” She didn’t have a clue, so I jumped online and found an easy-to-use mortgage calculator. I punched in their current loan amount and figured out that when they retire they will have paid their loan amount down to $98,000. She was actually surprised the number would be that low.

Next we discussed their retirement accounts and where they are putting their extra savings now. They were smart enough to meet with a financial planner several years ago and create a retirement plan. They’re putting money into that every month, but she confessed that she hasn’t been paying attention to it. She said, “Robert handles that and I guess I don’t care to get involved in all that. I’m more worried about what we owe to the bank and will we be able to keep making that payment in our retirement.”

I told her, “I’m sure your financial planner would love to help you better understand that, but let me help you with the mortgage question for now. We now know that when you retire, you’ll only owe $98,000 on your mortgage and I know you worry about having enough income to pay that mortgage every month after you both stop working. Do you know how much money you’ll have in your investment accounts when you retire? Why don’t you call your investment advisor and just ask him that one question and then get back with me.”

A few days later, she called me back and said the financial advisor didn’t seem to want to give her an exact number, but when pressed, he said that given their current strategy they should have just over $500,000 in savings. I said “Great. So your mortgage will be $98,000 and your investments will be at $500,000. If you wanted to, you could take $98,000 and pay off your mortgage on the day you retire.” It’s like a light bulb went off in her head as she said, “Oh, I guess I hadn’t thought of that.”

I let that sink in for a minute and then said, “Now, having said that, it’s quite possible that you may not want to do that. You’ll have to see what’s happening in the stock market at that time, but if you’re still making more than 4% in the stock market, you should probably leave that money in your investments. And by the way, your mortgage interest is still tax deductible so if you’re interest rate is 4%, the true interest rate is actually less than that by the time you account for the tax deduction.”

For those of you reading this that would like to pay your mortgage off early, you can easily cut 11 years off your mortgage if you simply make an extra payment each quarter. With a $220,000, 30-year mortgage that has a 4% interest rate, you’ll save an extra $65,000 if you use this method.

My client thanked me for talking to her and helping her understand this. She confessed that she’s glad they have a retirement account, but admitted it’s all confusing to her. She said the way I explained it just made sense to her. She can now rest easy and doesn’t worry about paying off their mortgage. She said to me, “Ron, thank you so much. I know this isn’t your job, but I do appreciate you taking so much time to help me understand this.”

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