By Frank Legan
Although the post-pandemic housing boom seems to be curbing a bit thanks to a rise in inventory (1), the desire for homeownership is still going strong. After all, what’s better than having a house of your own to make into a home?
Of course, this highly sought-after piece of the iconic “American dream” comes with a hefty price tag. And unless you have the luxury of purchasing a house in full, you’ll find yourself paying off a mortgage for the next 15-30 years of your life. There’s no getting around incurring this debt to one day own this major asset outright; so the question becomes how to handle this debt moving forward.
Should you put every extra dollar toward your mortgage or invest that money instead? As with most financial decisions, the answer depends on your unique situation.
Identify the Best Use of Your Funds
If you are considering paying off or paying more toward your mortgage, we can assume you have at least some extra cash each month or a lump sum you’re looking to put to use. Leaving additional funds sitting in a savings or checking account where you’re earning less than a percent of interest never makes 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 a simple comparison between their mortgage rate and the rate of return on their investment or portfolio.
Like most financial decisions, there are plenty of things that could affect the outcome, and the decision can’t be made in a vacuum. It’s 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 and expected return of your investment portfolio, and private mortgage insurance, among other elements of your financial life.
Weigh Your Options
There are some pros and cons to each choice. Liquidity is a significant benefit of investing since, depending on which type of account you invest in, you may 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 increasing the equity in your home, your options become more limited. The only way to access those funds would be to sell your house, do a cash-out refinance, or obtain a home equity loan or line of credit.
The advantages to paying down your mortgage are obvious. The additional cash flow created from the savings once the home is paid off can be redirected to your longer-term goals or strengthen your monthly budget once retired. However, paying extra toward your mortgage during your working years means less cash available to invest in securities with a higher expected return—which, if done wisely, could outperform the guaranteed return you get by paying down your mortgage.
The Allure of Debt-Free Living
While avoiding extra mortgage principal payments is oftentimes the right “financial answer,” paying off your mortgage can have other non-financial benefits as well. Transitioning into retirement debt-free can provide homeowners with peace of mind at a time when they are feeling financially vulnerable. Do not underestimate the feeling and mindset of having your mortgage paid off as you enter retirement.
It’s Not Necessarily All or Nothing
As with any major financial decision, the right strategy depends on several factors. It could be that a combination of these two choices is the best option for your unique situation. Before pulling the trigger, it would be a good idea to consult with a trusted financial professional who can offer objective advice.
At Cedar Brook Group, we strive to empower our clients to lead the lives they envision through insightful financial planning and wealth management. Our ultimate goal is to help you enjoy your home while also pursuing your financial and lifestyle goals with confidence.
Frank Legan is Partner, Financial Advisor, and member of the Investment Committee at Cedar Brook Group, one of the largest independent wealth management firms in Northeast Ohio. Frank spends his days designing and implementing personalized financial planning strategies for corporate executives, closely held business owners, artists, families, and retirees. He specializes in lifetime income strategies, investment advice, and estate planning services. He also works with businesses to develop strategic and succession planning strategies. Frank has a Bachelor of Arts degree in Political Science from the University of Dayton, as well as a Master of Public Administration degree focused on municipal management from Cleveland State University. Prior to joining Cedar Brook Group, Frank was a financial advisor in the private client group at Merrill Lynch and with NatCity/PNC Investments. Frank is active in his community, serving on various councils, boards, and committees. When he’s not working, you can find Frank spending time with his wife, Laura, their daughter, Reese, and their beloved collie, Charlie. Frank and his family are volunteers at St. Francis of Assisi church in Gates Mills. Frank serves as Chairman of the Board of Directors for Catholic Charities Diocese of Cleveland. To learn more about Frank, connect with him on LinkedIn.
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