Every week we receive an inquiry about one of two things: paying the existing mortgage off or purchasing a new residence -- with or without a mortgage. Many of our clients don't want debt, nor do they need to incur debt. They have plenty of assets and they would rather have a bit less money invested rather than worry about a mortgage payment each month. For these clients we strongly advise them to follow their initial instinct: no mortgage debt.
For other clients, mortgage debt is more complicated. They could pay off their mortgage if they want, but they would have less liquidity (or access to the funds) and that makes them uncomfortable. Or they would have to pay capital gains or income taxes if they were to liquidate their investments to pay off a mortgage.
Sometimes our clients have significant balances in their savings or money market funds (currently earning less than 1%) that exceeds the amount they need for liquidity. Meanwhile, they are typically paying more in interest on their mortgage than they are earning on their savings.
The mortgage interest deduction is a nice benefit for taxpayers in the higher tax-brackets. It certainly reduces the after-tax cost of the interest. Talk to your tax advisor to determine how beneficial the deduction really is. It may be less meaningful than you imagine.
Is the existing mortgage interest rate fixed or is it variable? Will it increase at some point in the future? What is the maximum amount it could increase each year and during the life of the mortgage? With interest rates near all-time lows, there is a good chance interest rates on a variable mortgage will be higher over the next five or ten years. Consider paying-off variable loans while interest rates are low.
If you did retain a mortgage, what are your investment alternatives? If you want a no-risk investment alternative, it isn't likely you will exceed the return of your mortgage interest expense. If you have a long-term investment time horizon (say 10 plus years), then a well-managed, globally-diversified balanced portfolio of stocks and bonds is likely to provide a return in excess of the mortgage interest expense, especially if you have locked into a 15 or 30 year interest rate that is very low. There are no guarantees this will happen but this could be a reasonable assumption.
Review your liquidity needs over the next few years. Will you need cash for college expenses, construction projects, new cars, gifts to children, etc.? It may be reasonable to keep cash on hand and retain a mortgage, depending upon your objectives.
No debt is the ideal, but in many cases mortgage debt is necessary and even reasonable. Your objectives, liquidity needs, risk tolerance, tax situation and investment alternatives will determine your approach. Comprehensive financial planning at the Raskin Planning Group can help you make this decision.
This article is for informational purposes. This information is presented with the understanding that Lincoln Financial Advisors Corp. and its representatives are not engaged in rendering mortgages. Peter Raskin is a registered representative of Lincoln Financial Advisors. Securities and advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (Member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. Raskin Planning Group is not an affiliate of Lincoln Financial Advisors. CRN-1173005-041415