Deciding between Paying Off a Loan and Investing
by Chris Cooper, Financial Planning Expert
February 05, 2016
Question: I have owned my house for 10 years and have a pending loan on it. I have recently retired and am wondering if I should pay off my mortgage or invest. Please advise.
Answer: I don’t understand the term “pending”. If you mean you have a mortgage on your home and you are wondering if you should pay off your mortgage early, or not, then that raises more questions before we can get to an answer. First, how old is your home? If your home is very old, and/or if your neighborhood or city is starting to decline then I would NOT pay off any mortgage, because you may need to move. In many parts of the USA, real estate prices are still underwater, and you could be stuck with this property even when you don’t want it. Having a mortgage on it gives you someone to buy your home; your mortgage company. You could let it go into foreclosure and move on (in recent years this is called “strategic defaulting” on your mortgage to get rid of a piece of property that you can’t sell.)
If on the other hand, your home is relatively new, is in a good area and city, and has decent appreciation potential, then we have two things to think about. First, is the mortgage payment high and causing you to have to withdraw more money per month from your retirement accounts (IRA’s, 401k’s, etc.)? Do you have sufficient AFTER TAX money (not retirement money, like IRA’s, etc.) to pay off the mortgage? Then you could consider paying off your mortgage. NEVER pay off a mortgage with retirement money as the income tax hit will be greater than the interest you pay.
The second thing to think about is: how is your health? Is it likely you could live in this home for the next twenty years? Does it have stairs? (when you have mobility challenges stairs are absolutely out!) Most people live in multi-floor houses and condominium buildings, so these can be a problem trying to live out your life in them.
There are more reasons not to pay off a mortgage than not in today’s financial world we live in now. Also, we are all living so much longer than we may actually live in many homes before we pass on. Be flexible in your thinking.
Chris Cooper is the owner and founder of Chris Cooper & Company, Inc., a fee-only financial planning firm for elderly persons and the owner and founder of ElderCare Advocates, Inc. a private geriatric care management and long term care consulting firm. As a California Licensed Professional Fiduciary, Chris can serve as Conservator of the Person and Estate under court appointment, as Agent under a Durable Power of Attorney for Financial matters and Health Care matters.
See more of Chris Cooper's expert answers