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14 West Hawaii Real Estate | December 21, 2018
Natalie Campisi: The pros and cons of paying off your mortgage early
Most homeowners want
to own their homes free
and clear. For some,
that means using a raise,
inheritance or savings to pay off their
mortgage early. But this seemingly
responsible move may not always be
in your best financial interest.
According to financial experts,
paying off your mortgage early actually
comes with a cost to your bottom line.
The reason lies in simple math: the
amount you’ll save in interest likely
won’t exceed what you would earn in
other long-term investments, such as
stocks and real estate.
For investments to make more
sense than paying off a mortgage
early, the annualized rate of return
over a certain number of years would
only need to make more than the
mortgage interest. And since most
people are sitting on relatively low
mortgage rates, between 3.5 to 5.5
percent, beating that rate isn’t tough.
The average annualized return
for the S&P 500 index over the past
90 years is roughly 10 percent. Using
the cash to leverage more real estate,
such as multifamily properties and
single-family homes, is another longterm
investment that will likely offer
higher long-term yields compared with
paying off your mortgage, says Richard
Bowen, CPA and owner of Bowen
Accounting in Bakersfield, California.
It’s not an easy call
However, it’s important to work
with a financial advisor before you
invest so you can fully understand the
risks and benefits involved, Bowen
adds. Although history tells us that
these investments outpace saving on
your mortgage interest rate, they can
“Sadly, the math tell us, it’s almost
always better to invest in other places
than in your mortgage,” Bowen says.
“The thing is no one can give you a
guarantee on an investment. You can
put your money in the stock market
and lose it. You can put your money
in real estate and it doesn’t perform
as well as you expected it to.”
Indeed, if you, like thousands of
others, had invested in Las Vegas real
estate before the 2008 financial crisis,
you’d have lost your shirt and pants,
too, when prices plunged 60 percent,
nearly twice the national rate.
Maintaining some liquidity
Financial experts agree that it’s
important to have a portion of your
net worth in liquid assets. These
are assets that can be converted
into cash quickly such as stocks,
marketable securities, mutual funds,
U.S. treasuries and bonds. A house is
considered a non-liquid asset because
it can take months, or longer, for a
homeowner to sell the property.
Liquidity is important in times of
economic downturns and personal
emergencies. Its primary function
is to be an easy way to access cash
when you need it. If your cash is tied
up in a house or retirement accounts
(which can be expensive to draw
from), you could end up having to
borrow money in a pinch.
“If you start paying down your
mortgage too fast you risk depleting
your liquidity. The kind of liquidity you
have is important, too. You don’t want
too much cash tied up in retirement
funds because you can get slammed
with fees if you have to withdraw
early,” warns Amanda Thomas, a client
advisor at Mission Wealth.
If you withdraw money from an
IRA before you turn 59 1/2, you will
pay a 10 percent penalty and income
taxes on the amount you withdraw.
After you turn 59 1/2 you will not have
to pay the penalty fee on withdrawals
but you’ll still be obligated to pay
income taxes. Depending on how
much you withdraw, this might be
pushed into a higher tax bracket,
which could mean a bigger bill from
Uncle Sam come tax time. Find out
the minimum distribution from your
retirement accounts here.
If paying off your house is more
valuable to you than earning a few
dollars more in stocks, be sure you
have a six-month emergency fund
saved before you commit a big chunk
of cash to your mortgage payment,
Families should strive to have a
minimum of three months after-tax
wages in the bank and low-income
earners should aim for at least $1,000
saved before putting extra toward a
“From a personal finance
perspective, you free up monthly
cash when you pay off your house,
but you remove a whole bunch of
cash to do that. As long as what
you’re giving up still leaves you with
the pad that protects you for six
months to one year then that’s okay,”
Poor savers might be the best payoff
Financial planning is a process
that’s unique to every individual.
Spending habits, timelines, how much
risk you’re willing to assume — and
how much you’re okay losing, as
well as your financial and personal
goals are all elements that go into an
If someone tends to spend or has
trouble keeping money in the bank,
then that’s a behavior that’s not likely
to change so it’s important to plan
around it, Bowen points out.
“The right thing to
do is the thing you will
do. All of this has to do
with personal habits.
If you’re going to
blow through the extra
money anyway, then
it’s better that you put
it into your house than
spend it,” Bowen says.
Paying off your mortgage early
will decrease your total mortgage
interest, which could save you
thousands, as well as help you build
Homeownership offers peace
According to ATTOM data, 34
percent of homeowners have 100
percent equity in their homes. For
many people, including Thomas,
owning your home offers benefits
that can’t be tallied on a computer.
For folks nearing retirement,
eliminating that monthly mortgage
payment can be a mental relief when
they’re facing a fixed income.
“Personally, I’m paying down
my mortgage. It feels good to have
it paid off before retirement. It might
not always make financial sense but it
offers peace of mind and it might allow
for better budgeting,” Thomas says.
Homeowners can also borrow
against the equity in their home by
way of a home equity line of credit,
or HELOC, in case of emergencies or
to make improvements to their home.
HELOC interest rates are still historically
low and if you use the funds to add on
or make repairs to your home, then the
money is tax deductible.
The important thing is for people
to identify their financial goals and to
allocate their money appropriately.
Although financial planning seems like
an exercise in logic, it’s often ruled
by emotion. People want to feel good
about where there money is and that
doesn’t always line up with what a
spreadsheet might recommend.
For some people, owing money
causes stress, so getting rid of debt
is a better use of funds than keeping
the debt in order to earn extra in
“My wife likes having money in
the bank whereas I’d rather invest
it. But if money is a tool, then that
money is buying her happiness, so
it’s working,” Bowen says.